Quantitative study on eco-economic compensation for water rights trading along the South-to-North Water Diversion Project in China Open Access

Water shortage has become a worldwide problem that affects sustainable development, ecology systems, and the environment (Liu 2020; Mu et al. 2022). Water rights trading can address water shortage by optimizing the allocation and utilization of water resources, through the regulation of market mechanisms (Colby et al. 1993; Nir 1996; Shen et al. 2020). After the completion and implementation of the South-to-North Water Diversion Project (SNWDP), water rights trading along the route has witnessed a steady rise. Pingdingshan and Xinmi, Nanyang and Xinzheng, Nanyang and Dengfeng, Dengzhou and Zhengzhou, and Nanyang and Zhengzhou have signed trans-regional water rights trading agreements for the middle route of the SNWDP (Guo et al. 2018). The owners of water rights can transfer the right of the remaining water resources to the water-deficient users, so as to redistribute the water resources (Yan 2019). However, water rights trading will have external effects on the ecology, economy, and society, causing losses to the seller (Huang & Odum 1991; Bourgeon et al. 2008). To address loss-related issues and ensure fairness in water rights trading in the future, scientific and reasonable compensation to sellers is crucial.

Several scholars have carried out qualitative and quantitative studies on the compensation of water rights trading. With respect to qualitative studies, Saliba & Bush (1988) pointed out that the transfer of water may induce negative external effects, including water quality deterioration, decrease in fish and wildlife habitats, and ecological and environmental degradation. Huang & Zhang (2017) proposed that, in the future, water rights trading may have adverse effects on agricultural economy, backflow water, water source area, eco-environments, and farmers’ social welfare. Kendy et al. (2018) focused on impacts of water transaction programs on other water users and local economies, and developed a suite of socioeconomic indicators, including economic productivity of irrigated agriculture, irrigated farm labor, and municipal and industrial supply cost-effectiveness. Pérez-Blanco et al. (2020) indicated that cross-basin water rights trading may damage the environmental flow and affect water use in the downstream basin, where the water is sold; this may not be conducive to sustainable economic growth. He et al. (2021) constructed a water rights trading model based on systems theory for the agricultural water savings-economy-ecological environment, and analyzed the industrial impact produced by water trading. Although these qualitative studies have determined various ecological problems, they have ignored the economic and social aspects, and do not portray a systematic understanding of the compensation system.

Regarding quantitative studies, He et al. (2007) proposed a novel method to calculate the economic and ecological compensation cost, based on the analysis of water rights conversion costs. Zhou et al. (2008) selected the Chaobai Basin as their study area and calculated the reduction in crop production and farmers’ income resulting from water resources redistribution. Based on changes in ecosystem service value, Gao et al. (2019) formulated an ecological compensation standard for the eastern route of the SNWDP. Lv et al. (2021) established a quantitative compensation system for agricultural water rights trading, based on the emergy theory, but this system considered only the compensation related to agriculture water rights trading. Wang et al. (2022) quantified the economic effects of water rights trading with considerations of subjectivities of managers under different hydrological years by a Bayesian approach. These studies adopted the method of internalization of external effects to monetize non-market commodities, such as ecological and social effects. However, these methods, which were based on monetary theories, could not reflect the real value of non-market commodities.

The compensation of water rights trading should be considered from the aspects of society, economy, and eco-environment. An economic method based on monetary theory reflects the non-market commodity problem with difficulty. The emergy theory of the eco-economic system considers emergy as the foundation, while comprehensively analyzing and evaluating the energy, currency, population, and information flows of a system (Lan et al. 2002; Chen et al. 2011). This theory can not only reflect non-market problems, but also unify economies, societies, and ecology systems, thus addressing a limitations in a system's economics (Wu et al. 2018).

In this study: (i) we consider the economic, social, and ecological losses resulting from water rights trading, and analyze the composition of eco-economic compensation. (ii) Based on the emergy theory, we propose a quantitative method system of eco-economic compensation for water rights trading along the SNWDP. (iii) We quantify the eco-economic compensation from the short and long term, and analyze water rights trading along the Pingdingshan-Xinmi route. These studies provide new ideas for cultivating a water rights market of cross-basin water transfer projects. The proposed method can not only provide a reference for future water rights trading price, but also promote the rational allocation of water resources and sustainable development of the water rights market.

According to the letter of intent, the first trading period started from July 1, 2016 to October 31, 2018 and was divided into three phases with a total volume of 24 million m³. The second trading period started from November 27, 2020 to November 27, 2021 with a total volume of 22 million m³. Since the time of the second trading period was relatively short and relevant statistical data have not been released, we chose the first trading period as the research object. In this study, we applied emergy quantification methods to estimate the eco-economic compensation for water rights trading along the Pingdingshan-Xinmi route from 2016 to 2018, by collating the corresponding original data and determining the emergy transformity (conversion value). The socioeconomic data was acquired from the Henan Statistical Bureau (2017-2019) and Pingdingshan Statistical Bureau (2017-2019). The water resource data was obtained from the Pingdingshan Water Conservancy Bureau (2016-2018). The solar emergy transformity was derived from Lan et al. (2002).

Pigou (2017) defined ‘external diseconomy’ as a phenomenon in which some people’ production or consumption induces losses for others while the former cannot compensate the latter. Public goods may have externalities in their supply or consumption processes (Wei 2014). Water rights trading is a process of water resources redistribution, which can be restricted by natural conditions and controlled by anthropological social and economic activities. Due to the quasi-public goods property of water resources, which is competitive but not exclusive, the change of water quantity by water rights trading easily causes external diseconomy. The external uneconomic problems of water rights trading refers to the adverse impact on the economy, society, and ecology caused by the transaction subject in the development and utilization of water resources or other production activities. These adverse effects are generally unified organically, interact and restrict each other.

According to the literature analysis, the economic compensation of water rights trading generally includes compensation for industrial and agricultural production reduction and engineering costs (Lv et al. 2021). Differing from general water rights trading, the basic and supporting projects along the SNWDP are comprehensive, and the supporting engineering system along the route has been preliminarily completed (Guo et al. 2018). As the water-receiving area of the middle route of the SNWDP, Pingdingshan does not need to consider the engineering cost. In addition, the water in receiving areas is mainly used to support the livelihood of residents, improve industrial production, and repair the ecological environment, and is generally not used for agricultural production. To sum up, the economic compensation for water rights trading of the SNWDP only includes industrial production reduction compensation. Due to the water rights trading, there is a reduction in the surplus water of the water seller, and it probably has no effect on the industrial economy in the short term. However, with the expansion of the scale of industry and the increase of the demand for water resources, the sold water can no longer be used for local industrial production, and the available water cannot meet the demand for local industrial purposes. This is bound to cause economic losses to the seller, therefore, necessitating sufficient compensation for the losses.

Abundant water and biological resources in a watershed water ecosystem can attribute landscape and recreation value to a region. this mainly includes two aspects: first, the aesthetic value brought by rivers, lakes, aquatic organisms, and natural landscapes can offer people spiritual pleasure; second, the entertainment value generated by water leisure activities, such as swimming, boating, and fishing, can improve the quality of social services (Lv et al. 2021). A reduction in water area will lead to a decline in landscape and recreation value, resulting in social losses. To ensure sustainable development, this social loss, considered as the loss of landscape and recreation, should be compensated accordingly.

The ecological compensation of water rights trading consists of the compensation for destroying ecosystem service functions and mainly includes the following aspects:

• (1)

  Water purification compensation

Water provides the ideal solution conditions for environmental purification. Countless chemical substances can be dissolved in water for physicochemical and biological reactions, thus promoting the purification of the environment. The environmental purification of water provides great ecological benefits for people (Lv et al. 2021). Notably, flow reduction affects the purification capacity of the water and causes ecological loss. This loss should obtain a corresponding compensation, in particular, water quality purification compensation.

• (2)

  Cooling and humidification compensation

The regulating function of water on climate is based on the physical changes in water. In an ecological system, water changes from a liquid to gaseous state through surface evaporation and plant transpiration. In the evaporation process, water absorbs heat to achieve the effect of cooling. In the atmosphere, water vapor rises to a certain height to then form clouds and induce rainfall to regulate air humidity (Lv et al. 2021). Water reduction leads to a decrease in evaporation, thus weakening the ability of a region to induce cooling and humidification, resulting in ecological losses. The compensation corresponding to this loss is called cooling and humidification compensation.

• (3)

  Biodiversity reduction compensation

Water has the function of protecting biodiversity. It provides the material energy and habitat for aquatic animals and plants and a region for other organisms to interact. It has a significant effect on the protection of endangered plant resources, especially for ornamental plants, environmental greening plants, and species introduction and breeding (Lv et al. 2021). In the future, water rights trading will affect water quantity and quality, and consequently reduce the species diversity of aquatic organisms. This needs to be compensated for accordingly.

Emergy is a bridge that connects ecology and economics. Based on emergy, the true value of different types and levels of energy can be measured and compared. The same perspective can be used to convert different kinds of incomparable energies into comparable emergy (Odum 1996; Lv et al. 2021). In general, a water seller's compensation must consider the impact of water rights trading on the socioeconomic system and on ecosystems comprehensively. Emergy analysis provides a method for the quantitative analysis of eco-economic systems and proposes an integrated analysis method to measure and compare various ecological flows (Ulgiati et al. 1994). Based on an analysis of the eco-economic compensation composition of water rights trading, we were able to establish a viable emergy quantitative method.

The impact of water rights trading on the economy is closely related to time, and the economic loss of the seller is not obvious in the short term. With rapid urban economic development and the increase in water consumption in the industrial sector, economic loss will occur when the industrial water supply is not sufficient. Therefore, the quantitative compensation of water rights trading based on emergy theory should be divided into short-term and long-term periods.

The economic value of water resources in industrial production systems reflects the contribution share of water as a production factor in related economic activities. It can be calculated by multiplying the industrial production contribution rate of water resources with the output emergy of the production system (Lv et al. 2021). The quantification of the compensation for industrial production losses with respect to water rights trading can be calculated using the economic value of water resources in the industrial production system. Notably, the level of economic development is closely related to time, and water rights trading may not have an obvious economic impact on the seller in the short term. With the expansion of industrial scale and the increase in the demand for water resources, the available water will not satisfy the demand for local industrial water, thus aggravating the economic impact of water rights trading. Depending on water supply (W_S), demand (W_D), and trading (W_T), in general, there are three situations regarding the economic compensation for water rights trading:

• (1)
  When ⁠, the water seller still has surplus water and the impact of water rights trading on the economy is not obvious. In this case, economic compensation may not be considered, as follows:

  

  (3)
• (2)
  When and ⁠, the seller experiences water shortage and the impact of water rights trading on the economy begins to surface. In this case, the economic compensation is quantified according to the difference between the volume of water supply and water demand, which can be expressed as follows:

  

  (4)

  where IWC is industrial water consumption; EM_I is the emergy of the total contribution of water resources to production; and WCR is the contribution rate of industrial water resources.
• (3)
  When and ⁠, the economic loss caused by water shortage can be divided into two aspects: on the one hand, water rights trading leads to a decrease in water quantity; on the other hand, the water demand exceeds the water supply capacity due to the rapid economic development. When the volume of local water shortage is greater than the quantity of traded water, water rights trading has the greatest impact on the economy. In this case, the economic compensation of water rights trading can be quantified according to the total transaction water quantity, as follows:

  

  (5)

  where WCR is equal to the ratio of the water emergy used by the industrial production system to the total input emergy of the system.

Quantification methods based on emergy theory, and on water purification, cooling and humidification, and biodiversity reduction compensations, are explained in detail below:

• (1)

  Water purification compensation

• (3)

  Biodiversity reduction compensation

Both Pingdingshan and Xinmi are affiliated to Henan Province; therefore, we considered the EDR of Henan Province as the standard. The solar emergy of each item was calculated using Equation (1). The total emergy of the eco-economic system in Henan Province was calculated by subtracting the emergy output from its input; the EDR was calculated using Equation (2). The calculation results are shown in Table 1.

According to the characteristic curve of Baiguishan Reservoir (Zhao 2008; Zhang et al. 2018), for the condition of normal water level, a reduction of 4 million m³ will reduce the water surface area by 9.11 hm², and a reduction of 10 million m³ will reduce the water surface area by 23.04 hm². The calculation results of social compensation in Pingdingshan in 2018 are shown in Table 2.

Because the activity period of water rights trading between Pingdingshan and Xinmi is short, the number of biological species does not portray a significant change, and there are only limited available relevant statistical data. Therefore, in this study, we did not calculate the biodiversity reduction compensation in the region. The quantification results of ecological compensations were as follows:

• (1)

  Water purification compensation

According to the Environmental Status Bulletin of Pingdingshan (PEEB2016–2018), the main water pollutants in Pingdingshan were N, P, and chemical oxygen demand. With respect to the water quality of Baiguishan Reservoir, which is a large-scale reservoir in Pingdingshan (considered as the standard), we adopted the average water quality standards of grade III. Based on the Environmental Quality Standards for Surface Water (GB3838-2002), in grade III, the amounts of N, P, and chemical oxygen demand were 1 mg/L, 0.2 mg/L, and 20 mg/L, respectively. According to the emergy analysis of the eco-economic system (Lan et al. 2002), the emergy transformities of N, P, and chemical oxygen demand were 3.80 × 10⁹, 3.90 × 10⁹, 5.9 × 10⁸ sej/g (calculated by multiplying the reagent cost of potassium dichromate reflux and EDR).

• (2)

  Cooling and humidification compensation

The average annual temperature from 2016 to 2018 was acquired from the Pingdingshan Statistical Yearbook (PSB 2017–2019) and then substituted into Equation (9) to calculate the annual evaporation latent heat in Pingdingshan. The actual evaporation of trading water was referenced from Zhu & Zhou (2013), that is, the evaporation reduction was obtained by multiplying the amount of trading water with the evaporation coefficient of Pingdingshan. Notably, the evaporation coefficient was 0.62 (Zhu & Zhou 2013), and the steam emergy transformity was 12.20 sej/J (Lan et al. 2002). The calculation results of socioecological compensation in Pingdingshan for 2018 are shown in Table 2.

Social and ecological compensations are not closely related to time; therefore, their long-term calculative process is the same as that for short-term. The prediction results of water supply and water demand are an important basis for the quantification of economic compensation in the long term. Referring to Guo (2016), the forecast of water demand in Pingdingshan (95% guarantee rate) is 1.20 × 10⁹ m³, and water supply is 1.06 × 10⁹ m³. As the water demand was estimated to be greater than the water supply and the difference between water demand and water supply would be greater than the trading water, the water shortage of Pingdingshan was estimated to be 22 million m³. According to total emergy of industrial water and total industrial input emergy, we quantified the contribution rate of water resources in industrial production systems. Based on the prediction of the volume of water supply and water demand, we also quantified the compensation for industrial production loss. The calculation results are shown in Table 3.

• (1)

  According to the short-term compensation quantitative results from 2016 to 2018, the average values of unit volume water eco-economic emergy and monetary compensation were 3.80 × 10¹⁰ sej/m³ and 0.35 ¥/m³ respectively; the average values of unit volume water social and ecological compensations were 0.027 ¥/m³ and 0.32 ¥/m³, respectively (Table 4 and Figure 4(a)). According to the long-term compensation quantitative results for 2030, the average values of unit volume water eco-economic emergy and monetary compensation were 5.57 × 10¹¹ sej/m³ and 4.88 ¥/m³, respectively, and those for unit volume water social, ecological, and economic compensations were 0.028 ¥/m³, 0.30 ¥/m³, and 4.55 ¥/m³, respectively (Table 4 and Figure 4(c)). These results revealed that, in the short term, water rights trading between the two regions resulted in social and ecological losses to Pingdingshan City, whereas in the long term, the city experienced great economic losses. Xiao (2009) calculated the compensation amount of unit volume water in the Shaanxi water source area of the middle route of the SNWDP for 2010 and 2030 as 1.204 ¥, based on the analysis of water quantity and quality and the value of water resources, while ignoring the consideration of landscape recreation service compensation; notably, in this study, the relation between economic compensation and time was also not taken into account in the long-term prediction results.

• (2)

  From the quantitative structure of short-term compensation, the unit cubic water social compensation accounted for 7.86%; ecological compensation accounted for 92.14% (Figure 4(b)). From the quantitative structure of long-term compensation, the unit cubic water social compensation accounted for 0.57%, ecological compensation accounted for 6.15%, and economic compensation accounted for 93.28% (Figure 4(d)). The results indicated that short-term water rights trading had the most prominent impact on the ecology of the region, far greater than the impact on society.

Among the ecological compensation components, the compensation for cooling and humidifying accounted for 53.61%, and that for water purification accounted for 46.39%. This indicated that both cooling and humidification and water purification were the main factors that affected the ecology of the regions. Thus, we could deduce that long-term water rights trading had the most prominent impact on the economy, far greater than the impact on society and the ecology of the region. This was mainly determined by the forecast results of future water supply and demand. We could conclude that, in the future, water demand will exceed supply; the economic loss will be serious, and therefore, economic compensation will increase.

• (3)

  According to the water rights trading agreement between Pingdingshan and Xinmi, the transaction unit price was 0.87 ¥/m³ (Guo et al. 2018). We compared the trading water price and compensation quantification results and observed that, in the short term, the sum of unit volume water social and ecological compensations was less than the trading water price, and in the long term, the unit volume water economic compensation was far greater than the trading water price. This indicated that the losses caused by short-term water rights trading were compensated, while those caused by long-term water rights trading were not. The implementation of long-term water rights trading can impede the development of the seller, and therefore the seller needs to ensure the reasonable allocation of water resources to ensure the sustainable development of the region and the water rights market.

• (4)

  This study has several limitations. For example, because the period of water rights trading for the SNWDP was too short at the time of the study, the number of biological species did not change significantly; therefore, we did not consider the loss of biodiversity caused by water rights trading. In addition, the value of water resources in industrial production was calculated based on emergy theory. However, the internal composition of the eco-economic system is generally very complex, and because we simplified the factors pertaining to water resources and their relationships, and considered only limited data, our study does not provide a comprehensive compensation analysis of the region. Therefore, future studies must utilize detailed statistical data for Pingdingshan to form more nuanced, detailed, and reliable conclusions.

The aim of this study was to address the problem of eco-economic compensation of water rights trading in cities along the South-to-North Water Diversion Project in China; therefore, we established a system of eco-economic compensation based on the theory of externality and put forward a quantitative method based on the emergy theory of eco-economics and analysis. The proposed method realized a unified measurement of economic, social, and ecological compensation for water rights trading. Considering Pingdingshan-Xinmi water rights trading as an example, the eco-economic compensation of the water seller in Pingdingshan was quantified and analyzed. According to proportion analysis, water rights trading in the short term will bring socioecological losses to the water seller, and in fact, the seller has obtained certain compensation. Over a long-term period, economic compensation occupied the dominant position of eco-economic compensation. This indicated that water rights trading resulted in great economic loss to the seller, which will affect the economic development and ultimately affect the normal implementation of future trading.

The global water shortage situation is increasingly serious. Many countries build water diversion projects to alleviate a water crisis, providing a good platform for water rights trading along the line. With respect to its economic, social, and ecological impacts, water rights trading could be a major issue in the future and affect not just human settlements, but also ecological systems and habitats. In order to make water rights trading develop in a reasonable, fair and sustainable direction, the ecological economic compensation for water rights trading cannot be ignored. The research in this study provides a theoretical basis for formulating a reasonable trading price, and is conducive to cultivating the water market along the cross-basin water transfer project and maintaining the equity of water rights trading. Fair water rights trading can not only alleviate the contradiction between supply and demand in water shortage areas, but also provide a strong guarantee for the establishment and development of a water rights market and ensure the long-term stability and sustainable development of human society.

This work was supported by the National Key Research and Development Program of China (2021YFC3000204).

All relevant data are included in the paper or its Supplementary Information.

The authors declare there is no conflict of interest.