Watershed Horizontal Ecological Compensation Policy and Green Ecological City Development: Spatial and Mechanism Assessment

Green ecological development has become an inevitable choice to achieve sustainable urban development and carbon neutrality. This paper evaluates the level of green ecological city development in the Xin'an watershed as measured by green total factor productivity (GTFP), analyzes the direct and spatial effects of the Watershed Horizontal Ecological Compensation policy on GTFP, and further examines the moderating effect of the Research and Development (R&D) incentives, industrial structure, and income gap. This paper conducts difference-in-differences (DID) and spatial regression analysis on 27 cities from 2007 to 2019. The results show that GTFP progresses to varying degrees across cities over time, especially in the pilot cities. Crucially, the Watershed Horizontal Ecological Compensation policy significantly improved GTFP, although the effect was slight. Interestingly, the increase in GTFP in pilot cities that implemented the policy spatially suppressed the increase in GTFP in cities that did not implement the policy. Our evidence also shows that the positive effect of the policy is higher in regions with higher R&D incentives and industrial structure upgrading, which indicates that R&D incentives and industrial upgrading are crucial. In comparison, the income gap has not made the expected negative adjustment effect under the Chinese government's poverty alleviation policy. However, the positive policy effect is heterogeneous in the downstream and upstream pilot cities. The "forcing effect" of the policy on the downstream cities is more favorable than the "compensating effect" on the upstream cities. Therefore, policymakers should pay more attention to ensuring the effectiveness of the Watershed Horizontal Ecological Compensation policy in enhancing GTFP as a long-term strategy to guarantee the sustainability of green ecological development in Chinese cities.