How does the horizontal watershed ecological compensation mechanism effect regional economy? - a county level empirical study on Xin’an River basin, China

Contradiction between economic development and ecological conservation is a main obstacle for countries’ transitioning towards sustainable development, and the horizontal watershed ecological compensation (HWEC) mechanism is designed to coordinate the contradiction in watershed level. To estimate the actual implementation effect of HWEC mechanism, this study carried out an empirical study on the Xin’an River basin in China. Based on panel data of the Xin’an River Basin from 2005 to 2020, this study constructs a propensity score matching and difference-in-differences (PSM-DID) model to systematically study the impact of HWEC project on county economies. The baseline regression results show that the HWEC inhibits county economic growth (9.32%), and this conclusion still holds after several robustness tests. Heterogeneity analyses suggest that the inhibitive effect of HWEC exhibits variability in temporal, spatial, and industrial dimensions. Mechanism analysis suggests that the HWEC project exerts an overall negative effect on county economy by compelling the shift of local industrial structure from the secondary industry to the primary and tertiary industries. The study fills the economic efficiency estimation on HWEC and provides policy implications for optimization of HWEC to achieve watershed Sustainable Development Goals (SDGs).