Incentive-compatible payments for watershed services along the Eastern Route of China’s South-North Water Transfer Project Jichuan Sheng a,b,c , Michael Webber c,⇑ a Collaborative Innovation Center on Forecast and Evaluation of Meteorological Disasters, Nanjing University of Information Science & Technology, 219 Ningliu Road, Nanjing 210044, China b School of Economics and Management, Nanjing University of Information Science & Technology, 219 Ningliu Road, Nanjing 210044, China c School of Geography, University of Melbourne, 221 Bouverie Street, Parkville, VIC 3010, Australia article info Article history: Received 23 December 2016 Received in revised form 1 April 2017 Accepted 15 April 2017 Keywords: South-North Water Transfer Project Eastern route Payments for watershed services Evolutionary game Numerical simulation abstract In transboundary rivers, upstream and downstream users have different interests, which affect their will- ingness to pay to protect the river’s ecological services. This is true of the Eastern Route of China’s South- North Water Transfer Project (SNWTP), with the added complication that the State Council Office (of SNWT Construction Committee) supervises upstream and downstream users. This paper analyses the strategies of upstream users, downstream users and the State Council Office, to explore an incentive- compatible system of payments for watershed services through a tripartite evolutionary game model. The results demonstrate that: First, whether lower Yangtze governments can obtain payments for reduced access to water depends on State Council Office’s supervision costs. Second, upstream and down- stream users’ initial willingness to participate may determine the ultimate evolutionary stable strategy. Third, State Council Office could ensure that payment system works, by increasing punishment for users that are initially unwilling to pay for watershed services. Fourth, high opportunity costs and high pay- ments to upstream governments reduce the upstream and downstream users’ incentives to participate. All these factors need to be considered in designing payment systems for watershed services to establish an incentive-compatible scheme and realize appropriate water governance in SNWTP. Ó 2017 Elsevier B.V. All rights reserved. 1. Introduction Increasing demand for irrigation, domestic and industrial water have produced a huge growth in the number of large-scale water infrastructure projects. Many of these projects involve water trans- fer from basins of surplus supply to those in deficit, and are not only in developed countries (Davies et al., 1992; Meador, 1992) but also in developing countries (Griffin et al., 1989). Developed countries adopt water transfers to improve water use efficiency in all sectors of the economy, while developing countries use water transfers to meet untrammeled water demand (Ghassemi and White, 2007). After investing approximately $20 billion and reset- tling more than 300,000 people (Ministry of Water Resources, 2002), China’s SNWTP has become the largest and most expensive inter-basin water transfer megaproject in the world (Pohlner, 2016). Its middle and eastern routes are now operational (Fig. 1). The combined transfer capacity has reached 18.4 billion m 3 , and will reach 27.82 billion m 3 according to long-term plans (Ministry of Water Resources, 2002). The SNWTP aims to change the uneven spatial distribution of water resources in China by bringing water from the Yangtze River to North China. In 2013, the first phase of the Eastern Route was completed. Unlike building new trunk canals in the Middle Route, the Eastern Route expands the scale of Yangtze River Water Transfer Project in Jiangsu Province and extends it north. The Eastern Route makes full use of the Beijing-Hangzhou Grand Canal and the existing rivers in the Huai and Hai River Basins, and connects the downstream regions of four major river basins – the Yangtze River, Huai River, Yellow River and Hai River basins. However, pollutants in the four basins have a serious impact on the quality of transferred water (Ministry of Environmental Protection, 2001). The Eastern Route passes through two of the most developed areas in China – the Yangtze River Delta and the Bohai Rim. With the vigorous develop- ment of manufacturing industry, water pollution has become par- ticularly prominent in these regions. Large amounts of untreated industrial wastewater are directly discharged to the lakes and riv- ers along the Eastern Route, and non-point source pollution caused by agricultural production causes a huge threat to these rivers and lakes (Zhang, 2009). For example, Jiangsu, one of the provinces http://dx.doi.org/10.1016/j.ecoser.2017.04.006 2212-0416/Ó 2017 Elsevier B.V. All rights reserved. ⇑ Corresponding author. E-mail address: mjwebber@unimelb.edu.au (M. Webber). Ecosystem Services 25 (2017) 213–226 Contents lists available at ScienceDirect Ecosystem Services journal homepage: www.elsevier.com/locate/ecoser