As eco-compensation is considered an effective economic instrument for controlling the industrial water pollution in transboundary basin, this study aims to explore a transboundary eco-compensation mechanism for Songhua River Basin that is one of the seven major drainage basins in China. Using a panel dataset of eleven cities in this basin tracked from 1992 to 2016, we empirically examined the environmental Kuznets curve (EKC) hypothesis by analyzing the relationship between economic development and industrial water pollution. Then, we developed two econometric models to quantify the wastewater discharge allowance and eco-compensation of investigated cities, respectively. The results specifically reveal the inverted U-curve effects of GRP (gross regional product) on industrial wastewater discharge, which displays an evidence of EKC in the field of transboundary water pollution in China. Moreover, our results verify the polluter pays principle that polluter should be responsible for its pollution behavior through paying of eco-compensation. Our results further interpret that the emissions trading program can help protect the ecosystem by allowing the wastewater discharge allowance to trading market.
Keywords: Emissions trading program; Environmental Kuznets curve; Industrial water pollution; Polluter pays principle; Transboundary eco-compensation; Wastewater discharge allowance.