FOREWORD xi
ACKNOWLEDGMENTS xiii
ABBREVIATIONS xv
EXECUTIVE SUMMARY xix

1 Introduction 1
Background 1
Objectives and Scope 2
Conceptual Framework and Approach 3
Outline of the Report 6
2 Water Scarcity in China: Current Situation 9
Spatial and Temporal Disparities 9
Water Pollution 11
Environmental and Social Impacts and Economic Loss 14
External Driving Forces of Water Problems 21
3 Water Resources Management in China: An Overview of Determinant Variables 25
Technical Solutions Are Available and Economically Feasible 25
Government Commitments, Plans, and Implementation 27
Excessive Fragmentation of the Water Management System 29
Policy Failures in Water Management 34
Summary 40
4 Improving Water Governance 41
The Concept of Water Governance 42
The Legal Environment for Water Management 42
Institutional Arrangements for Water Resource Management 47
Transparency and Information Disclosure 52
Public Participation in Water Management 55
Summary 59
5 Deepening Water Rights Administration and Developing Water Markets 61
Theory of Water Rights and International Practice 61
Development of Water Rights in China 67
Water Rights Reform in China: Case Studies and Project Insights 69
Basics of Water Market and Trading 71
International Experience with Water Markets 73
Emerging Experience of Water Trading in China: Case Studies 74
Challenges and Lessons for China 77
Recommendations 80
6 Improving Efficiency and Equity in Water Pricing 83
Water Pricing in China: Policy and Practice 83
Pricing for Environment and Depletion 86
Social Impact and Affordability 88
Protecting the Poor 91
Other Implementation Issues 94
Recommendations 95
7 Protecting Ecosystems in River Basins through Market-Oriented Eco-Compensation Instruments 97
Ecological Compensation Mechanisms in China 98
Concept and Methodology of Payment for Ecosystem Services (PES) 100
The Growing International Experience with PES Systems 103
Potential Use of PES in China 105
Recommendations 109
8 Controlling Water Pollution 111
Seriousness of Water Pollution 111
Causes of Pollution and Key Challenges for Pollution Control 112
International Experience 119
Emerging Institutional and Policy Issues 121
Recommendations 123
9 Preventing Water Pollution Disasters 127
Water Pollution Incidents in China 127
Concept and Framework for Pollution Emergency Prevention and Response 128
International Experience 129
Environmental Emergency Prevention and Response in China 132
Recommendations 135
10 Summary, Action Plan, and Issues for the Future 137
Summary 137
Action Plan 140
Issues for the Future 140
Concluding Remarks 143

APPENDIX: BACKGROUND PAPERS TO THIS REPORT 145
REFERENCES 147
INDEX 153

BOXES
1.1 The World Bank’s Analytical and Advisory Assistance Program. “Addressing China’s Water Scarcity: From Analysis to Action” 3
1.2 Recent Water Resource Management Studies at the World Bank 4
2.1 Water Crisis in Wuxi in 2007 21
3.1 China’s 11th FYP for Water Resources Development 28
3.2 Case Study: Evaluating the Implementation of the Water Pollution Prevention and Control Plans for the Huai River Basin 30
3.3 River Basin Agencies in France 33
3.4 Planning Scarce Water Resources Using Evapotranspiration (ET) Quotas 35
3.5 Distorted Economic Incentive for Pollution Discharge 39
4.1 The U.S. Experience in Promoting Law Enforcement 44
4.2 River Basin Management Legislation in the United States: the Case of the Susquehanna River Basin 47
4.3 Three Models of Water Resource Institutions in Europe 48
4.4 The EU Water Framework Directive 49
4.5 Integrated River Basin Management 50
4.6 EU Directive on the Freedom of Access to Information on the Environment 54
5.1 Water Rights in New Mexico 63
5.2 From Formal Rights to Contracts and Claims 63
5.3 Water Allocation Priorities in the Middle East: the Case of Israel 65
5.4 Registering and Monitoring Users: International Comparisons with Groundwater Management 65
5.5 Determining and Defining Environmental Flows 66
5.6 From River to Farm: Water Rights and Allocation in Inner Mongolia Water Resources Allocation Plan for the Yellow River 70
5.7 Defining and Allocating Consumptive Water Rights in the Hai Basin 71
5.8 The Colorado.Big Thompson (C-BT) Project 73
5.9 Idaho Water Supply Bank 74
5.10 Water Markets in the Murray Darling Basin, Australia 75
5.11 Channel Lining and Water Transfer: Experience from Hangjin Irrigation District, Inner Mongolia 76
5.12 Defining, Allocating, and Trading Rights in the Heihe Basin 77
6.1 The Marginal User Cost of Water in the Hai River Basin 88
6.2 Making Price Increases Acceptable: the Case of Chongqing 93
7.1 Additional Examples of Payments for Ecological and Environmental Services (PES) 104
8.1 Implementation of Water Pollution Control Plans for the Huai River Basin 114
8.2 Public Participation and Compliance with Environmental Standards: the Case of Japan 120
9.1 Water Pollution Incident in the Songhua River 128
9.2 The Sandoz Chemical Spill in Switzerland and Extending down the Rhine 130
9.3 Examples of National Legislative Systems 130
9.4 The Buncefield Incident, U.K. 131

FIGURES
1.1 Water Resource Management 5
2.1 Spatial Distribution of Annual per Capita Water Resources in China 10
2.2 Industrial Wastewater Discharge, 1995.2005 12
2.3 Industrial COD Discharge, 1995.2005 13
2.4 Trends in Water Quality at Monitored River Sections in China, 1991.2005 15
2.5 Trends in Water Quality Changes at Monitored River Sections in North and South China, 1991.2005 16
2.6 Surface Water Quality, 2000 and 2004 16
2.7 Groundwater Depletion by Province 18
2.8 Polluted Water Supplies in China 19
2.9 Rural Households with No Access to Piped Water and Diarrhea Incidence 20
2.10 Mortality Rate for Cancer Associated with Water Pollution in China, 2003 20
3.1 Ministries and Authorities Involved in Water Resource Management 31
3.2 MEP and MWR Water Quality Data for Huai River, 1998.2004 32
3.3 Integrated Economic Values of Water and Water Withdrawals in the Primary, Industrial, and Service Sectors in Eight Regions 38
6.1 Municipal Water Tariffs and Wastewater Charges by City 85
6.2 Share of Water and Wastewater Services Expenses for Average and Low-Income Households 90
7.1 Main Ecological and Environmental Services by Type of Service 101
7.2 The Simple Economics of Payments for Environmental Services 102
7.3 The Flow of Compensation from Beneficiaries to Land Users in a PES System 102
8.1 Water Quality in Chinese Rivers, 1991.2006 112
8.2 Percentage of Sections with Water Quality Grade IV to Grade V+, 2001 and 2005 113
8.3 Provincial Sewage Treatment Investments in Yellow River Watershed 117
8.4 Centralized Sewage Treatment Rates and per Capita GDP in 14 Provinces in Northern China, 2003 118
8.5 Centralized Sewage Treatment Rates by City Size in 2003 118
9.1 Common Elements of an Emergency Response System 128

TABLES
2.1 Spatial Distribution of China’s Water Resources and Other Social Variables 11
2.2 Wastewater and Pollutant Discharges, 2000.05 13
2.3 Current Trophic Level of Lakes and Reservoirs in China 15
2.4 Water Supply and Renewable Water Resources in China, 2005 17
2.5 Projected Water Demand 22
3.1 Performance in Meeting the 10th FYPEP Targets for Water Pollution Control 29
3.2 Wastewater Treatment Cost for Major Industrial and Domestic Sectors 37
3.3 Virtual Water Content of Selected Products 38
3.4 Urban Fixed-Asset Investment during the 9th and 10th Five-Year Period 39
6.1 Water Tariffs in Beijing, 1981.2007 85
7.1 Summary of EES, Service Providers, and Service Beneficiaries in the Lashihai Case Study, China 106
7.2 Suggested Increase in Lijiang Old Town Visitors’ Fee to Fund PES Scheme 107
7.3 Suggested Entrance Fees to Lashihai Nature Reserve to Fund PES Scheme 108
8.1 Planned Water-Related Investment Shares between the Central Government and Local Sources in Wei River Basin 116
8.2 Water Quality of Qixinghe Natural Reserve, 2007 117
10.1 Recommended Action Plan 141

Executive Summary

For years, water shortages, water pollution, and flooding have constrained growth and affected public health and welfare in many parts of China. Northern China is already a water-scarce region, and China as a whole will soon join the group of water-stressed countries. The combined impact of the widening gap between water demand and limited supplies and the deteriorating water quality caused by widespread pollution suggests that a severe water scarcity crisis is emerging.
China’s leadership is aware of the worsening water situation, and is committed to transforming China into a water-saving society. The 11th Five-
Year Plan (2006.10) sets a number of policy goals and priorities for water resource management, such as (a) adopting a more unified or better coordinated management system; (b) shifting from supply-side to demand-side management; (c) integrating river basin management with regional management; and (d) establishing a preliminary system of water rights trading.
To date, however, the increasing scarcity of water resources has not been effectively managed. Many national and local water resource management and water pollution control plans have not been fully implemented and many targets, including water pollution investment targets, have not been achieved. The economic costs of water pollution and scarcity are high. Water pollution poses a serious threat to public health and causes major economic and environmental losses, estimated by the Chinese government at the amount equivalent to about 1.7 percent of GDP or more in 2004.

OBJECTIVES AND SCOPE OF THIS REPORT
This report reviews China’s water scarcity situation, assesses the policy and institutional requirements for addressing it, and recommends key areas for strengthening and reform. It is a synthesis of the main findings and recommendations from analytical work and case studies prepared under the World Bank Analy - tical and Advisory Assistance (AAA) program entitled “Addressing China’s Water Scarcity: From Analysis to Action.” These studies focus on several strategically important thematic areas for China where additional research was needed, as identified by the research team and advisory group based on a review of pressing issues. These areas are governance, water rights, pricing,
ecological compensation, pollution control, and emergency response.
The approach has been to evaluate Chinese and international experience to identify policy and institutional factors that have proven effective
in promoting the adoption of water conservation and pollution reduction technologies. The research was based on literature reviews, qualitative
and quantitative policy analyses, household surveys, field trips, and case studies to develop feasible recommendations for a plan of action based on realities on the ground.

CHINA’S EMERGING WATER CRISIS
China’s water resources are scarce and unevenly distributed. China’s renewable water resources amount to about 2,841 km3/year, the sixth largest in the world. Per capita availability, however. estimated at 2,156 m3/year in 2007.is only one-fourth of the world average of 8,549 m3/year
and among the lowest for a major country. While China as a whole is facing serious water stress, its problems are made more severe by the fact that its water resources are unevenly distributed, both spatially and temporally.
China’s water resources availability varies greatly over space. The South, with average rainfall of over 2,000 mm/year, is more waterabundant
than the North, where rainfall only averages about 200.400 mm/year. Per capita water availability in northern China is only 757 m3/year, less than one-fourth that in southern China, one-eleventh of the world average, and less than the threshold level of 1,000 m3/year commonly defined as “water scarcity.”
The temporal pattern of precipitation further intensifies the uneven spatial distribution of water resources. With a strong monsoonal climate,
China is subject to highly variable rainfall that contributes to frequent droughts and floods, often simultaneously in different regions. While
precipitation generally declines from the southeastern coast to the northwestern highlands, it varies greatly from year to year and from season
to season. In the Hai and Huai basins, for example, river flows fall to 70 percent of their averages one year in four and to 50 percent one year in
twenty. Dry years tend to come in succession, accentuating the water problem.

China’s Water Productivity Is Low
China’s water productivity of $3.60/m3 is low in comparison with the average of middle-income ($4.80/m3) and high-income ($35.80/m3) countries. This gap is largely due to differences in the sectoral structure and efficiency of water consumption.
Water productivity in agriculture, which accounted for 65 percent of total water withdrawals, is the lowest of all sectors, due to extensive
waste in irrigation systems, and suboptimal allocation among crops and between different parts of the same river basin. Only about 45 percent
of water withdrawals for agriculture are actually used by farmers on their crops. In industry, which accounts for 24 percent of total water
withdrawals, the water recycling level is 40 percent on average compared to 75.85 percent in developed countries.
A major contributor to China’s low water productivity is its very inefficient water allocation system. A recent study of the Hai basin has found
that water productivity, as reflected by the economic value of water (EVW) in different uses, ranges from 1.0 yuan/m3 in paddy irrigation to
12.3 yuan/m3 in vegetable fields, 21.3 yuan/m3 in manufacturing, and 33.7 yuan/m3 in the services sector. The magnitude of these differences
in an extremely water-short region is indicative of a serious lack of market consciousness in the water allocation process.
China’s water scarcity is aggravated by extensive pollution. Over the past three decades, despite great efforts to control it, water pollution
has increased, spreading from the coast to inland areas and from the surface to underground water resources. Total wastewater discharges
have steadily risen to 53.7 billion tons in 2006. Domestic wastewater discharges have surpassed industrial discharges since 2000, and have become the most important pollution source. It was not until 2007 that the rising trend of water pollution discharges began to show a sign of reverse, as total 2007 COD discharges were reported to be 3.14 percent less than in 2006. However, the water pollution situation is still very serious. A major contributing factor is that only 56 percent of municipal sewage is treated in some form, versus 92 percent of industrial discharges.
Water pollution incidents also represent a serious threat. They overwhelm the already fragile water environment, contaminate downstream
drinking water for millions of people, and severely threaten public health and the quality of life.
As a result of continuing pollution, the water quality of most of China’s water bodies has been extensively degraded. In 2004, of all 745 monitored river sections, 28 percent fell below the Grade V standard (that is, unsafe for any use), and only 32 percent met Grade IV-V standards (that is, safe for industrial and irrigation uses only). Of 27 major monitored lakes and reservoirs,fully 48 percent fell below Grade V standards, 23 percent met Grade IV-V standards, and only 29 percent met Grade II-III standards (safe for human consumption after treatment).
The extent of pollution aggravates the scarcity of water. At present, approximately 25 km3 of polluted water are held back from consumption,
contributing to unmet demand and groundwater depletion. As much as 47 km3 of water that does not meet quality standards are nevertheless
supplied to households, industry, and agriculture, with the attendant damage costs. A further 24 km3 of water beyond rechargeable quantities
are extracted from the ground, which results in groundwater depletion.

Water Scarcity and Pollution Entail Substantial Costs
The most important costs relate to the health risks associated with polluted drinking water sources. Over 300 million people living in rural
China have no access to safe drinking water. The economic cost of disease and premature deaths associated with the excessive incidence of diarrhea and cancer in rural China has been estimated, based on 2003 data, at 66.2 billion yuan, or 0.49 percent of GDP.
Water scarcity is also undermining the capacity of water bodies to fulfill their ecological functions. Due to excessive withdrawals, even a minimum of environmental and ecological flows cannot be ensured for some major rivers in North China. To compensate for the deficit of surface water, North China has increasingly relied on groundwater withdrawals, often in excess of sustainable levels. Such overexploitation has resulted in the rapid depletion of groundwater reservoirs, leading to the lowering of water tables, the drying up of lakes and wetlands, and land subsidence in many cities.
The World Bank’s Cost of Pollution in China study estimated that the water crisis is already costing China about 2.3 percent of GDP, of which 1.3 percent is attributable to the scarcity of water, and 1 percent to the direct impacts of water pollution. These estimates only represent the tip of the iceberg. They do not include the cost of impacts for which estimates are unavailable, such as the ecological impacts associated with eutrophication and the drying up of lakes, wetlands, and rivers, and the amenity loss from the extensive pollution in most of China’s water bodies. Thus, total costs are undoubtedly higher.

A PLAN OF ACTION FOR ADDRESSING WATER SCARCITY
As outlined above, the major factors underlying the emerging water crisis point to the need for China to reform and strengthen its water resource management framework. In line with the broad strategy of developing a market economy, the focus of the reform needs to be on clarifying the role of and relationships between government, markets, and society; improving the efficiency and effectiveness of water management institutions; and fully embracing and using market-based instruments as much as possible.
On this basis, the following thematic areas were selected for attention: (a) improving water governance; (b) strengthening water rights administration and creating water markets; (c) improving efficiency and equity in water supply pricing; (d) protecting river basin ecosystems through market-oriented eco-compensation instruments; (e) controlling water pollution; and (f ) improving emergency response and preventing pollution disasters. The main findings and recommendations are summarized below. The combined set of recommendations, summarized in a table in the final chapter of this report, represents an action plan for addressing China’s water scarcity.

IMPROVING WATER GOVERNANCE
To address the growing complexity of water resource management, China is moving from a traditional system with the government as the main decision-making entity toward a modern approach to water governance that relies on (a) a sound legal framework, (b) effective institutional
arrangements, (c) transparent decision making and information disclosure, and (d) active public participation.

An Effective Water Governance System Has to Be Built on a Sound Legal Basis
China has made much recent progress in improving its legal framework. Even so, the effectiveness of the legal framework for water resource
management is unsatisfactory, as evidenced by the growing seriousness of water-related problems, including rampant water pollution nationwide. Its main weaknesses and areas for improvement are:

Lack of mechanisms and procedures
Existing laws and regulations are usually focused on principles and lack mechanisms and procedures for enforcement, such as supervision, monitoring, reporting, evaluation, and penalties for noncompliance.

Incomplete legal system
The coverage of the existing legal framework is still limited. For example, the Water Pollution Prevention and Control Law requires that the state establish and improve the compensation mechanism for ecological protection of the water environment, but there are no national laws or
regulations to support it. Neither is there a law on water rights and trading.

Ambiguities and conflicts between legal provisions
Some laws contain ambiguities. For example, the Water Law does not clearly define the authority of local governments and river basin anagement commissions (RBMCs). Such ambiguity in the provisions causes a vacuum of authority and weakens the effectiveness of the legal system.

Existing Institutions Are Fragmented and Uncoordinated
China’s water resource management system is characterized by extensive fragmentation, both vertical and horizontal. Horizontally, at every
level of government several institutions are involved in water management, with frequent overlaps and conflicts of responsibilities. This unwieldy system has increased the administrative cost of coordination among different institutions and undermined the effectiveness of water management.
The water management system is also vertically fragmented. It is mainly built upon the administrative boundaries of different levels of
government rather than at the river basin level. Each level of government has its own focal points and priorities. This makes the management of
transboundary rivers - most of China’s rivers - very difficult.
China has established RBMCs for its seven large rivers as subordinate organizations of the Ministry of Water Resources. However, these
commissions have limited power and have no representatives from the affected local governments in the basin. As a result, it is difficult for
the RBMCs to coordinate with the provinces/ municipal administrations and other stakeholders in river basin management.

Transparency Is Limited
Transparency means that the public can have better access to information on water resources, policies, and institutions on water-related issues
and water-related behaviors of various stakeholders. The Chinese government has been aware of the importance of transparency and made
efforts to increase the openness of public administration, but as of now, information on water quality and quantity, water users, and polluters
remains inaccessible to the public and to government agencies outside of the sector.
The legal definition of what information should be disclosed to the public is not clear, so that many organizations or enterprises refuse to
disclose water-related information in the guise of protecting state or business secrets. Finally, the citizens’ right of access to information is not
emphasized in the laws, so that although several regulations on information disclosure have been promulgated, they are not yet implemented well
because of weak supervision by the government and the public.

Public Participation Is Very Low
Public participation is helpful to tailor policy to local situations, to maximize the social welfare and utility of resources use, and to protect vulnerable groups. Major forms of public participation in water management in China are (a) public opinion surveys; (b) public hearings; (c) experts’
assessment/reviews of development plans and programs; and (d) stakeholder coordination. But actual public participation is still very low, which
is attributable to limited awareness by government agencies and the general public regarding the potential for public participation in water
management, lax legal requirements and supervision, and legal barriers to the registration and participation of NGOs, which should be expected
to play a very active role.

Recommended Actions
Amend and improve existing water-related laws and regulations
Given the vagueness and even contradictions of existing laws and regulations, the NPC should review and revise existing water-related laws, with
particular attention to the enforcement issue and integrated water management.

Improve law enforcement
Improving law enforcement is the number one priority to make the legal framework useful and effective. A series of actions need to be taken:
Implementation procedures: Detailed implementation procedures should be stipulated in all water-related laws and regulations to make
existing laws and regulations operational and enforceable.
Strengthened supervision and inspection: Supervision and inspection by the national and local congresses and administrative branches should be strengthened.
Public participation: The public should be empowered to help monitor and track down violators and supervise local agencies responsible for law enforcement, and public-private partnerships should be encouraged by laws and regulations.

Establish a national-level organization for integrated water management
One option is to establish a State Water Resources Commission as a coordinating and steering organization on water-related affairs across the country at the highest level of government. This commission will serve as a high-level water policy-making body, much like the newly established
State Energy Commission headed by the premier. Another option would be to merge major water-related duties currently under different government agencies (namely MWR, MEP, MOA, MHURC, and MLR) and establish a new super ministry to implement unified management of
water quantity and quality, surface water and groundwater, water resource conservation and use, and water environmental protection.

Convert RBMCs into intersectoral commissions
The existing RBMCs for the seven major rivers should be converted into true intersectoral and intergovernmental “commissions” with representatives from relevant line agencies and local governments, instead of being subordinates of MWR. In the long run, RBMCs should be made
independent of MWR and accountable to the State Council directly.

Make public information disclosure a compulsory obligation of the government, companies, and relevant entities
Public information disclosure requirements should be incorporated into all major development strategies, policies, regulations, and operational
procedures. The information must be accessible for the public and concerned groups/ communities and be made available through multiple channels.

Build a strong legal foundation for public participation
The rights of public participation should be emphasized in relevant laws to empower the public. In such laws as the Water Law and the Environmental Protection Law, articles should be added to explicitly grant rights of participation in water management to the public. Three rights
need to be clearly defined: (1) the right of access to information, (2) right of participation in decision making, and (3) right to challenge waterrelated
decisions by the government.

STRENGTHENING WATER RIGHTS ADMINISTRATION AND CREATING WATER MARKETS
The allocation of water rights and the establishment of water markets can improve the economic efficiency of water use in China and help
resolve water shortages. China has been establishing a water rights administration since 2000, and has made remarkable progress in some piloting
areas. A preliminary framework of laws, regulations, and institutions on water rights has been developed at the national level. Additional actions are needed to deepen water rights administration and develop water markets.

Water Allocations Exceed Sustainable Levels
At present, there is a general lack of consideration and provision for environmental water requirements, with the result that for many surface
water bodies and underground aquifers, water withdrawals are far in excess of sustainable levels. In some instances, water has been set aside for the environment, but these volumes are not allocated on a sound scientific basis. This poses a threat to the long-term health and sustainability of the water resources in question.

Water Rights Are Still Unclear and Unenforceable
Establishing clear, enforceable rights is an essential first step toward the creation of water markets. At present it is not always clear who holds
the right and what the right entitles the holder to. There are few rules in place that protect against changes to water rights and no clear
provisions dealing with what happens when a right is adversely affected.

Water Rights and Allocations Need to Be Based on the Evapotranspiration Approach
Past water management in China, based on water abstraction only, has encountered only limited success because the saved water was used
to irrigate more land; that is, more water was consumed and less water returned to the surface and underground water systems. Recent advancements in remote sensing and geographic information system (GIS) technologies have made it feasible to manage water resources in terms of the amounts of water actually consumed through evapotranspiration (ET). The portion consumed through ET is the consumptive use that is lost
and not available for users downstream. In contrast, the portion that returns to the surface or underground water systems is still available for
other users downstream. ET technology thus makes it feasible for China to adopt a more scientific approach for its water rights allocation and administration.

Water Rights Administration and Trading Need to Be Strengthened
China still has a distance to go in establishing a well-functioning water rights administration system. First, water rights and water rights trading
represent a relatively new concept for water resources management in China, and require reforms in institutions and policies that have been traditionally based on “command-andcontrol” regulation. Second, implementing tradable water rights requires improvements in the monitoring and information system for decision making and the enforcement of regulations. Third, there is no precedent for implementing tradable water rights in a large developing country like China, with its unique physical, economic, and social background. It is a challenge, but international experience and pilot projects support tradable water rights as a promising approach for China to pursue.

Recommended Actions
Use water resources allocation plans as the basis for water rights
Water resources allocation plans should be developed.first at the basin level, then at the regional level.as the basis for allocating water within a basin. Plans should set a cap for total water abstraction permits in the plan area and clearly identify the water available for abstraction, the amounts of water consumed, and the amounts that must be returned to the local water system.

Recognize ecological limits of water resources
Water resource allocation plans should recognize the requirements of the in-stream environment for water. Water should be set aside for this purpose, recognizing the importance of different parts of the flow regime for different parts of the ecosystem.

Water withdrawal permits need to be clearly specified and implemented
Permits must be specified in volumetric terms and need to be linked to the initial allocation of water established in the water resource plan. The total amount of water withdrawal permits should be limited to the maximum allowable amount based on sustainable water use with sufficient
consideration of environmental uses and new water uses.

Strengthen water rights administration and provide certainty and security for holders of water rights
Water rights administration needs to be strengthened, with the conditions, procedures, rights, and obligations for water withdrawal, consumption,
and return flows clearly specified. The process for granting water rights, and in particular for allocating water on an annual basis, should be clear and consistent. This will provide certainty and security for holders of water rights. Adequate monitoring, reporting, and enforcement are part of effective water rights administration. Public participation, such as group par ticipation through water user associations in rural areas, is critical to the success of water rights management.

Where feasible, an ET-based water resource management should be promoted
The ET approach focuses on actual water consumption and hence encourages more efficient use of water, increased return flows, and the adoption of more water-saving technologies. The ET approach can thus help improve the sustainability of the water resource system in both agricultural and urban areas. Governments should promote the ET-based water resource management, especially in water-stressed areas.

Adopt a step-wise approach to water trading
The sale or lease of water rights can be an effective approach for raising the productivity of and returns to water within and between sectors.
But before trading starts, the entitlements of users under different levels of resource availability must be clearly defined. Once all stakeholders
have gained experience in managing, monitoring, and observing rights, trading options can be explored, often starting with temporary trading in well-defined systems where infrastructure for delivery and monitoring is already in place.

IMPROVING EFFICIENCY AND EQUITY IN WATER SUPPLY PRICING
Traditionally, China’s policies have focused on meeting the demand for water by increasing the supply rather than managing demand. An important
factor contributing to the current waterscarcity crisis is the lack of effective water resource policies that focus on demand management and
encourage efficient water use.

Water Pricing Can Be an Effective Means to Reduce Demand for and Improve the Economic Efficiency of Water Use
The central and local governments in China have recognized this, and allowed water tariffs to gradually rise since the early 1990s. Even so, repeated studies have shown that water and sewerage prices in China are still below the requirements for financial cost recovery and take little account of environmental and dep letion costs. This has made it difficult for the water and sewerage utilities to adequately maintain their infrastructure, expand their service to outlying and poorer areas, and operate their infrastructure in a manner that meets environmental standards. Thus, the first step toward setting prices right should be to at least meet the utilities’ financial performance requirements.

To Promote Efficient Water Use, Water Prices Also Need to Reflect the Marginal Opportunity Cost of Supply
Prices based on marginal opportunity cost (MOC).which includes production, environmental, and depletion costs.would signal the full scarcity value of water to the consumer and induce the appropriate adoption of water-saving and efficiency technologies. Current tariff regulations in China already allow all of the components of marginal opportunity cost to be recognized and signaled to the consumer. Production costs are contained in the water development fee, environmental and depletion costs in the water resource fee, and waste disposal in the sewerage fee. But local authorities have been slow to fully implement the necessary tariff increases allowed by regulation, mainly as a result of concerns about the impact on the lowincome population.

Equitable and Efficient Tariff Reform Is Feasible
Although often stemming from concern for the well-being of poorer households, low water tariffs have perverse consequences for income distribution. Results from household surveys show that the social impact of low water pricing on the poor is negative; they receive little or no benefit from the water price subsidies, but pay a high price for poor water supply services in terms of health impacts and the high cost of alternatives. On the other hand, tariff reforms can be designed to at least partially protect the poor from the impact of higher rates. Provided the
increased revenues are used to extend the service infrastructure and improve the quality of service, a win-win solution can result. In China and other countries, three such approaches have been used: (1) increasing block tariffs (IBT), as already enshrined in Chinese regulations; (2) income
support; and (3) price waivers for the poorest households.

Recommended Actions
Given the low efficiency of and high demand for water use, China should aggressively use pricing policy to manage water demand. This means that water tariffs, including wastewater treatment fees, have to continue increasing in the years to come. For pricing reform to be successful, the following recommendations are important.

Adopt a step-wise approach to tariff reform
The public should be fully informed of the problems of low service quality, indirect costs, inefficiency caused by underpricing or subsidization of water, and the importance of water tariff increases. Public hearings, consumer education, and transparency are necessary to overcome
resistance to price reform, especially when existing service quality is poor.

Raise water tariffs to fully reflect its scarcity value
While the first step in price reform must be to fully achieve financial cost recovery, pricing of water and sewerage should follow the MOC
approach and reflect the incremental costs of water and its disposal, including the costs of environmental damage in production and consumption
and the opportunity costs of depletion. A system should be devised in which MOC estimates can be integrated into regional and
national water management and economic planning systems so as to enhance the market consciousness of the allocation process while the
trading system is being developed.

Address the social impact of tariff increases
The increasing block tariff approach, especially a two-tier tariff structure, is recommended for residential consumers. The first block should follow
the WHO-recommended 40 liters per capita per day (i.e., about 5 m3 per month for a household of four), with the second block gradually increasing
to full MOC. Other pricing or income support methods for the poor are encouraged to be adopted based on local political and economic circumstances. Water tariffs for commerce and industry should cover the full MOC.

Convert the water resource fee to a tax
The water resource fee, which is currently retained by local governments, provides little incentive for sustainable water resource development
basin-wide or at the national level. The fee should be converted into a tax, the proceeds of which will be transferred to and appropriated by the central government. Such a conversion will provide a financial basis for the central government to facilitate more efficient water resource planning based on national priorities for water resource development and management. The funds of local water resource management programs should be delinked from the revenue of water resource fees and
directly provided by central and local governments
through their annual budgets.

PROTECTING RIVER BASIN ECOSYSTEMS THROUGH MARKETORIENTED ECO-COMPENSATION INSTRUMENTS
Addressing water scarcity requires protecting the sources of the water, especially the ecosystems in the upper reaches of river basins, such as forests, wetlands, and even agricultural lands. Both central and local governments are increasingly interested in the use of government transfers from public funds - under the name of ECMs - to protect ecosystems in the upper reaches of river basins. But the current approach relies on public financial transfers (mainly from the central government), and lacks a direct link between ecosystem service providers and ecosystem service beneficiaries. This raises some doubts about the long-term financial sustainability and efficiency of ECMs.

Payment for Ecosystem Services (PES) Offer a More Market-Oriented Approach
In a PES system, a market for environmental services is created whereby money is collected or reallocated from the beneficiaries who use environmental services (water consumers) and payments are made directly to those who provide these services (such as watershed land managers). PES offers a more market-oriented and selffinancing alternative to the government-funded ECMs currently used in China.

PES Has Been Tested in Other Countries and Has Great Potential in China
PES has been developed and implemented in other countries with encouraging results and can be applied in China, as illustrated by the case
study of the Lashihai Nature Reserve in Lijiang City, Yunnan Province. While PES schemes are not a universal panacea, nor always easy to introduce, they should be treated as one step forward to enhance and complement existing efforts of ecosystem conservation in China.

Recommended Actions
Continue to expand the application of ECM
Given the urgency of protecting ecosystems in the upper reaches of river basins for water supply, China should continue to expand its ECM
programs, especially when the ecosystem service providers and beneficiaries are distant from one another and their links cannot be explicitly
defined, or where there are obvious poverty alleviation benefits.

Promote the piloting of PES
To improve the efficiency and effectiveness of ecological compensation and reduce the financial burden on governments, China should vigorously
pilot more market-oriented approaches for ecological compensation, such as PES. It has much appeal in China and should be piloted and promoted, beginning with some small watersheds.

CONTROLLING WATER POLLUTION
The government has acknowledged the seriousness of water pollution and placed it at the top of pollution problems facing the country. Since
the mid-1990s, COD reduction has been one of two major nationwide total emission control targets (the other is SO2). Even so, total COD
emissions have increased since the early 1990s, largely due to an increase in emissions of untreated municipal wastewater. In spite of over a
decade of effort, it was not until 2007 that the rising trend in total COD discharges appears to have finally been reversed.

There Is Inadequate Investment in Water Pollution Control and a Large Amount of Wastewater Is Still Untreated
The investment shortfall contributed to the failure to meet pollution control targets - such as reducing COD discharge by 10 percent by the
end of 2005 - and to environmental deterioration. With insufficient investment, wastewater treatment capacity, including sewerage networks,
has not expanded adequately, especially in small cities and townships. As a result, only 56 percent of the 53.7 billion tons of domestic wastewater
discharged is treated in some form; the rest is still discharged without any treatment, offsetting the significant reduction in industrial pollution.

Many Water Pollution Prevention and Control Plans Have Failed to Achieve Their Objectives
China has prepared water pollution prevention and control plans at the national, local, and river basin levels. So far, many of these plans have
failed to achieve their targets. For example, the Huai River basin was the first river basin in China to undertake a major planning effort for
water pollution control. Evaluation of the first two five-year plans (1996.2005) found that the water quality and total emission control targets
were not achieved. For instance, the 9th FYP’s (1996) water quality target for 2000 was to achieve Class III for the entire main stream.
However, by 2005, the water quality at 80 percent of monitoring sites in the basin was still at Class IV or worse.

Serious Water Pollution Is Attributable to Institutional and Policy Shortcomings
The effectiveness of pollution control is constrained by several issues: (a) poor law enforcement and compliance; (b) failure to implement
water pollution prevention and control plans; (c) lack of incentives for wastewater treatment; (d) a wastewater discharge control system undermined by problems with the issuance of permits, and their monitoring and enforcement; (e) lack of integrated river basin management and weak local commitment to pollution control under the influence of local and sectoral interests; (f ) increasing and unchecked pollution from
townships and nonpoint sources; and (g) insufficient and spatially imbalanced investment in wastewater treatment.

A Number of Issues Deserve Greater Scrutiny
Some of these issues include carefully defining the objectives of the Water Pollution Prevention and Control Law; providing more reliable and complete information on pollution sources; emphasizing the linkage between water pollution and unsafe drinking water sources; integrating pollution
control measures, especially the use of permit systems; strengthening the deterrent function of current legislation and enforcement systems for
managing water pollution; promoting routine pollution prevention over after-incident treatment; and addressing the relationship between the polluter-pays principle and government responsibility at the regional and national level, especially in those areas where governments have some responsibility due to their past activities.

Recommended Actions
The key to controlling and solving serious water pollution in China is the strengthening of law enforcement to improve compliance by industries
and other polluters. The government has to use all available means.legal, institutional, and policy.and, through them, mobilize the public and motivate the private sector to ensure full compliance with all pollution control requirements. Specific recommendations are provided below.

Improve pollution control planning
Water pollution control planning in river basins should be improved, with the introduction of more realistic and tangible targets. Pollution control
should not be regarded as the final target, but the way to achieve a clean and healthy water environment. This requires a long-term, integrated,
but progressively targeted strategy for the protection of water quality. The financing, implementation, monitoring, and evaluation mechanisms
should be well-embedded in the plans.

Unify and strengthen the pollution monitoring system
Better monitoring capability is required for the whole range of measures required for effective pollution control. The current segmented water
monitoring system.involving MEP, MWR, and MHURC.has to be reformed. In the short term, the systems should be better coordinated, with a unified set of monitoring criteria and procedures for releasing water quality information in one channel. In the medium term, the different
monitoring systems can be consolidated and managed by a third entity independent of any single ministry.

Strengthen the wastewater discharge permit system
To be effective, the wastewater discharge permit system should be built on a more solid legal basis, with a special administrative regulation
issued by the State Council. The issuing of permits has to be technically sound and based on environmental quality, with daily maximum
levels of discharge specified in order to achieve ambient targets. It should target key pollutants first and aim to control the total pollution load
within the allowed pollution carrying capacity of the environment.

Increase reliance on market-based instruments
Pollution control efforts should take full advantage of market mechanisms to overcome market failures in pollution reduction. Economic incentive
measures (such as the pollution levy and fines) have to be rigorously enforced to provide a strong incentive for polluters to comply with
emissions standards and other environmental requirements. The upper limits of maximum fines specified in current laws should be increased.
Furthermore, the system of trading of water discharge permits should be gradually introduced in watersheds to improve the economic efficiency of
wastewater treatment.

Enable litigation for public goods
The litigation system should be used to give more protection to the public interest. The law should encourage or require local governments on behalf of the public to initiate lawsuits against polluters and demand full compensation for damage to public goods - for example, to ecosystems - where damage to individuals is hard to identify. For significant cases, MEP itself might be the plaintiff.

Control rural pollution
Attention should be given to addressing rising water pollution in small towns and rural areas. The regulation of industrial and municipal sources
in small towns and rural areas should be carried out by local EPBs and supervised by MEP. With regard to wastewater, sewage treatment in small
towns should be promoted through the introduction of cost recovery policies, selection of efficient technologies, and the reuse of treated
water for irrigation.

Increase financing for market gap areas
There are several areas where market-based approaches cannot be expected to effectively address, for which the central government needs
to earmark special budgets with which to finance water pollution prevention and control. These areas include: (1) transprovincial pollution control
and management, (2) important ecological regions and water sources, (3) dealing with accidents affecting international water bodies, and
(4) other issues with a national dimension that cannot be properly managed at the local level.

IMPROVING EMERGENCY RESPONSE AND PREVENTING POLLUTION DISASTERS
Despite some successful recent cases of environmental emergency response, the high frequency of serious pollution incidents and their
associated costs in China support the need for continued reform and strengthening of existing institutions for environmental pollution emergency prevention and response. Current practice in emergency management still suggests that the main focus of local governments has been on mitigation after an incident. But prevention of incidents by strict enforcement of appropriate policies and regulations is typically a more cost-effective approach and should be emphasized. A situation analysis shows that the problem is attributable to various factors, ranging from weak legal and institutional arrangements, lack of incentives, and poor chemical management systems to inadequate on-site coordinating, monitoring, and reporting.
Based on lessons from the international experience, the basic elements of an effective prevention and response system, as already developed
and implemented in many developed countries, include (a) a shift from mitigation to a focus on risk assessment, prevention, and planning;
(b) enhancing the preparedness of first responders; (c) rigorous implementation of the polluter-pays principle to shift financial responsibility for the costs of potential disasters to pol luters, (d) the establishment of chemical information management sys tems to track the flow of toxic chemicals and provide the necessary information for a quick and effective response if an accident occurs, and (e) effective public information systems to provide timely information in the event of an emergency.

Recommended Actions
Shift from mitigation to prevention and planning
Environmental protection and work safety agencies should be the competent authorities to approve the adequacy of environment and safety
risk assessment, applying a thorough risk management approach that focuses on both prevention and mitigation of the impacts of chemical
incidents. All high-hazard plants.regardless of age.should be subject to risk assessment and be required to prepare an emergency response plan.

Enhance preparedness
First responders should be well trained for handling chemical incidents and equipped with the mandate and resources to contain pollution
releases. The National Chemical Registration Center and its regional offices should establish a unit, independent from enforcement divisions,
to provide 24-hour technical support to the emergency services on the properties and appropriate responses to specific chemical releases
from a safety and environmental perspective.

Establish an environmental disaster fund through the implementation of the polluter-pays principle
An environmental disaster fund with sufficient revenue to support such activities as information management, training, and clean-up for environmental incidents should be established. Funds could be raised through an increase in the pollution levy and/or the introduction of environmental taxes on toxic chemicals. In addition, increased fines for pollution accidents to cover the cost of clean-up and compensation should be considered another source for the fund.

Establish a chemical management information system
The central government should establish and maintain comprehensive inventories of all chemicals and pollution sources containing information
consistent with international standards. The function and effectiveness of the two existing systems developed by SAWS and MEP separately should be reviewed. Inventories should be consistent, comprehensive, and easily used in public emergency prevention and response. A comprehensive labeling system for chemicals should be established and applied to all parts of the production, storage, and transportation process.

Strengthen monitoring and public information
In the event of an incident, local environment and safety authorities should establish appropriate additional monitoring to assess the impact
on the health and safety of the local communities and the environment. Investigation findings should be reported to the central authorities,
and a mechanism established to share lessons learned and introduce new legally binding practices and procedures if necessary. The public
has the right to be informed of the final investigation results.

ISSUES FOR THE FUTURE
While this report has addressed a number of critically important issues relating to water resource management in China, much work remains to
be done. The various studies identified a number of areas where further work is required. Some of these issues for the future.relating to
agricultural water, climate change, and strategic assessment and economic analysis for river basin plans and programs.are highlighted below.

Water Efficiency, Food Security, and Rural Development
The case studies have revealed great variations in the economic value of water by sector and by region, low economic efficiency of agricultural water use, and poor cost-effectiveness of underground water withdrawal in North China. Although the general direction should be to raise water-use efficiency by reducing demand for water by the agricultural sector, progress is complicated by and associated with various issues involving the rights and wellbeing of the rural population, national food security, agricultural sector protection, and poverty alleviation. The central issue is how to reduce rural poverty and secure the nation’s food supply while at the same time improving the efficiency of water use. This issue will require further study.

Climate Change Adaptation
Global warming caused by human activities can be one of the biggest threats to the natural environment and human well-being. The scarcity
and vulnerability of China’s water system can be negatively affected by climate change, and remedial and adaptation measures need to be taken to ameliorate these effects. How to fully take into account climate change impacts and mainstream adaptation measures in the institutional and policy reform of water resource management in China is an issue for further investigation.

Ecological and Economic Studies of River Basins
Effective application of water management measures.such as water pricing, water allocation and water rights administration, ecological compensation, and water quality management in a river basin.all depend on good analysis and understanding of the ecosystems and the economic value of competing water uses, such as agriculture, energy, municipal water supply, and flood control in the river basin. In many cases, the important analytical work remains to be done. Developing a sophisticated analytical system.using advanced economic, geographic, and ecological tools.is required for sound policy making.

Development Strategies, Policies, and Plans and Their Long-Term Impacts on Water Scarcity
China’s Environmental Impact Assessment Law, effective in 2003, required strategic environmental assessments (SEAs) for regional and sectoral development plans. These include land use, water resource management, and water pollution control plans for river basins. However, such SEAs have rarely been carried out due to the lack of knowledge, expertise, and capacity of planning agencies and local environmental bureaus and research institutes. As a result, the long-term impacts of these plans on water scarcity conditions and the natural environment are in question. This situation has to be changed.

CONCLUDING REMARKS
There is no doubt that China is facing a major challenge in managing its scarce water resources to sustain economic growth in the years ahead.
This is a daunting task for the Chinese leadership, but past experience in China and in other countries provides some lessons as to the way
ahead. Of course, China is unique in many ways, and will have to adapt techniques and policies developed elsewhere to suit its own circumstances.
But there are grounds for optimism; the Chinese, who have demonstrated immense innovative capacity in their successful program of economic
reform, can and should take another bold move in reforming the institutional and policy framework to make it become a world leader in water resource management.

Fig 2.1　Spatial Distribution of Annual per Capita Water Resources in China Fig. 2.7　Groundwater Depletion by Province (million m3) Fig. 2.8　Polluted Water Supplies in China Source: Adapted from WB (2007a) with data from the Ministry of Water Resources. Fig. 2.9　Rural Households with No Access to Piped Water and Diarrhea（下痢） Incidence Source: World Bank (2007a). Worldbank（2009）による『Addressing China's water scarcity : recommendations for selected water resource management issues』から