Journal of Geoscience and Environment Protection, 2014, 2, 151-156
Published Online April 2014 in SciRes.
How to cite this paper: Feng, S. J. et al. (2014). Study on Ecological Compensation for Coal Mining Activities Based on Eco-
nomic Externalities. Journal of Geoscience and Environment Protection, 2, 151-156.
Study on Ecological Compensation for Coal
Mining Activities Based on Economic
Sijing Feng*, Daohan Wang, Xinlian Zhang
College of Environmental Science and Engineering, Liaoning Technical Un i ve rsit y, Fuxin, China
Email: *
Received March 2014
The developm ent and e xp l ora tio n m od e of co al r es ou rce ac tivities in C hin a resul t in t remend ous
waste of re sou rc es an d ec ol ogic al e nvironm ent pollution problems. This a rt ic le an aly zed th e use
of econom ic theo ry of ext ernalitie s of coal mi ning a ctivities fro m the p oi nt of envir onment al eco-
nomics pri ncipl es, proposed the e col ogic al c omp en sation c onn ota tio n of coa l mining acti vities,
and analyz ed the feasibil ity of th e implem ent atio n of ecologic al compensa tion from e con omic
Ecologic al Compensation; Economic Externalities; Co al Mi ning Ac tivities
1. Introduction
In terms of economic category, ecological compensation belongs to Kaldor-Hicks improvement. Using Kaldor-
Hicks efficiency, an outcome is more efficient if tho se that are made better off could in theory compensate those
that are made worse off, so that a Pareto improving outco m e results. Ecological compensa tion aims to improve
the quality of eco-system by the method tha t compensate for o ne s who c ontribute to ecological protection to re-
gional places a nd industries (Gert Van Hecken & Jo han B astiaensen, 2010).
Thi s property results in consultation between different areas, apartments, fields, a nd economic subjects. And
also it should r el y on readjustment and control of regulatory authorities.
With the rapid de ve lop me nt of global economic and so ciety, energy and environment becomes the crucial
problem for a country that whe the r it co uld maintain sustainable deve l o pment or not. Ecological compensation
is one of the most popular hot issues in academic fields of environme nt economy and ecological economy. In a
conte xt of conti n ue d environmental degradation of coal mini ng cities a nd its landscapes, the concept of Pay-
ment s fo r Ecosystem Services (PES) has been attracting growing attention in both academic and po lic y circles.
Payment for ecological services pla ys an important role in compensation plans, which means that beneficiaries
of ecological services pay for providers or administrators of these services.
Corresponding author.
S. J. Feng et al.
Since 1990, China attempted to carry out a la r ge number of ecological compensation practices and legisla-
tions. Most of the ecological compensation plans are biased for t he financia l tran sfer mechanism whi ch aimed at
ecological environment protectors and const r ucto r s. In 2005, China Council for Internatio nal Cooperation on
Environment and Deve lo pme nt establis hed a scientific research team which called “Ecological Compensation
Mechanism and Policy Research Teamand made a series of systematic research on China’s ecological com-
pensation mechani s ms and policies. This team made a concl usion that ecological compensation is an institution
that regulates interests by using economic methods between related individua ls so as to protect and utilize eco-
system services sustainab ly (The Research Gro up on Eco-Compensation Mechanism and Policies in China,
2007). T ha t is to say that ecol o gical compensation actually is a public system which regulates interests between
related individ ua ls by utilizin g econo mic methods and authorities accord ing to ecosystem services price (Q ua n
Dong, 1999), cost of the ecol o gical protec tio n a nd opportunity cost for develop ment (W e iguan g Xie & Xiong
Chen, 2008).
Compared with t he definitio n of the co ncept explained by ecological scholars on ecological compensation
(Bergstrom J. C., 1990 ), (Berg L. V., & Braun E., Otgaar A. H. J., 2003). Chinese researchers believe tha t the
core of the compensation is environ me nta l destruction, whic h mainly emphasize compensation for damaged
ecosystem rather than ecological service value provided by ecosystem. Moreover, char ge fo r ecological service
emphasis on financia l compensation of ecosystem services and the recovery and mana ge me n t of ecosystem en-
vironment destruction. Ecological compensation mechanis m ha s b ecome an efficient co mprehensive polic y to ols
whi ch promoted ecological protection and exceed di ffe rent departments, different regio ns , d i ffe r ent specific re-
sources or ecological laws a nd r e gul at ions.
2. Connota tion of Ecological Compensation for Coal Mining A ct iv iti es
In recent years, ecological problems which ha d caused by mineral resources explo itation in China b ecome more
and more ser ious. The establis hment of ecological compensation mechani s m of coal mining is the na t io na l poli-
cy demand and national practice requir e me nt s of China. Coal resource production and processing is the leading
industry of coal resource cities and j ust because of the ext ensi ve econo mic growth coal mi ni n g i ndustry leads to
tremendous waste of natural resources and deter ioration of ecosystem so exacerbated the pressure on urba n
ecosystem. The coal resource t ype cities depend on local coal resource inte ns i ve ly because of its relatively sim-
ple industrial structure a nd its ecological environment by coal mining ac tivities. In this article, t he compensation
for coal mining activities mainly focus onecosystemandenvironment”, which includes funding supports,
gover n ment subsid ies, tax exemption, po licy supports so as to recover fro m po llution and ecological service
function depression because of coal mining.
3. Economic Externalities of Coal Mining Ac tiv ities
In economics, an externality is the cost or benefit that affects a party who did not choose to incur that co st or
benefit (B uc hana n James, 1962). Economic externality include s ne gative exter nality and positive exter na lit y. A
negat i ve exter na lit y (also calledexternal costorext ernal disecono my”) is an action of a product on consum-
ers that imposes a nega tive eff ect on a third party; it isext erna l cost”. A positive externality (also calledexter -
nal benefitorexternal economy”) is an action of a product on consumers that imposes a positive effect on a
third party (Bur ton Weisbrod, 1964). In early 1990s, two Br itish economists are credited with having initia ted
the formal st udy of externalities. Henry Sidgwic k is credited with first articulatin g, and Arthur C. Pigou is cre-
dited with formal iz ing, the concept of externalities, or sp illover effects (Mc Co nne l l Campbell R., & Brue St a n-
ley L., 2004).
Fro m the a spect of resources allocation, economic externality presents a phenomeno n of low efficiency which
beyond the scope of decision makers (Mc Connell Campbell R., & Brue Stanley L., 2004). In ecosystem of coal
resource city, exte rna l eco nomy refers to that t he coal mi n i ng promote the develop ment of the city’s econo my
rapidly and improve people’s living standards with the cost of coal resources depletion. Ext e r nal diseconomy
mainly refers to envir onme ntal p ollution and ecological dama g e which accompany wit h coal mining activities
and the absence of appropriate environ mental compensation which should be paid by those who assumed the
The usual economic analysi s of externalities can be illustrated using a s tandard supply and de mand di agr am if
the externality can be valued in terms of money. An extra supply or deman d cur ve is added, as in the diagrams
S. J. Feng et al.
be low. One of the curves is the pr ivate co s t that consu mer s pay as individ uals for ad ditional quantities of the
good (here represents coal products), whic h in competitive markets, is the ma r gi na l pr i va t e cost (MPC). The
other c ur ve is the true cost tha t society as a whol e pays for production and consumption of increased production
the good, or the margi nal social cost (M SC). Similarly there migh t be two curves for the demand or benefit of
coal products. T he social demand curve would reflect the benefit to society as a whole , while the normal de-
mand cur ve ref lects the benefit to consumers as individuals and is reflected as effective demand in the market.
Figure 1 sh ows the effects of a negati ve externality of coal mining activities. In the graph, the coal ind ustry is
assumed to be selling in a competitive marketbefore pollution-co ntr ol laws wer e imposed and enforced (e.g.
under laissez-fair e ). The marginal private c ost is less than the marginal social cost by the amount of the external
cost, i.e., the cost of air pollution, water pollution and eco logical damage. It is assumed that t her e are no external
benefits, so that marginal social benefitMSB
equals margina l private benefitMPB.If the consumers only
take into account their o wn pr ivate cost, they will end up at price P0 and q ua nti ty Q0, instea d of the more e f fi-
cient price P* and qua nti ty Q*. The se latte r r eflect the ide a t ha t t he mar ginal social be nefi t sho uld eq ual the ma r -
ginal social cost, that is that production should be increased only as long as the mar ginal social benefit exceeds
the margi na l social co st. T he result is tha t a free market is inef fic i e nt si nc e at t he quantity Q0, the social benefit
is less tha n the social cost, so societ y as a who le would be better o ff if the coal yield between Q0 and Q* ha d not
been produced. The problem is that people are buying and consuming too much coal product. Coal mining en-
terprises only paid for coa l minin g, processing, sailing and mana gement. Thus, the government has to take
char ge of recovery and clean task that shoul d be charged by those coal corporations.
As we all know, coal mi ning activities wil l pollute air, soil and water. Thi s discussion implies that ne ga t i ve
externalities (suc h as environmental pollutio n and degradation by coal mining activitie s) are more tha n merely
an ethical problem. Hence, when MSC > MPC and its curve move above MPC intersection of curve s, the cross
point B co r r es po nd with production Q*, which repr esents the optimal maxi mu m social welfare. Because of the
existence of the e xte r nal cost of environmental pollution and ecological damage caused by coal mining, the coal
enterprises would yield quant it y Q0 r ather tha n quantity Q*. And corporation would improve coal yield progres-
sivel y, whic h could maximize their pr ivate be n efit . So t he pollution whic h created by coal enterprises would be
emitted excessivel y.
4. Economic Analysis of Ecological Compensa tion on Nega tive Externality of Coal
Mining Act iv it ies
According to ecological economy t he ory, the internalizatio n of negati ve e xt e r nalit y of coal mining activities is
the most essentia l thi n g to establish ecological compensation mechanis m. The nega tive externality of coal min-
ing activities refer to tho s e ad verse effects which i nc l udes envir on ment al p ollution, ecological damage and some
restrictions on survi val a nd d e ve lo pme nt of the residents in coal mini ng area. Generally, ecological service func-
tion has particular eco no mic value and can freely e xc hange in a perfectly competitive market (Kelsey. Jack. B.,
2009). In this case, we can define the ecological compensation foundations of the negati ve externalities of coal
mini n g activities o nly when we exa mi ne t he production process and the marginal costs and b enefits of ecosys-
tem services function.
Coal yield
Figure 1. External diseconomy analysis for
coal exploitation.
S. J. Feng et al.
Figure 2 illustrates t he rela tionship between margina l costs of coal mining co mpany and loss of ecological
service, it indicate s the ecos yste m destruction during coal mining ac tivities. Similar to the theoretical ana lysis of
Pigo u tax, if we a ssumed that MPC sta nd s for external dis eco no my witho ut considering coal mining cost a nd
MSC sta nd s for external dise c o nomy after considering coal mining cost. And in the circumstance, Q1 and Q
stand for ecological service losses caused by coal mini ng respectively and P1 and P repres ent coal price respec-
tivel y. Here, Q represents optimal ecological losses of social service and Q1 represents actual amount of envi -
ronment caused by coal mining company. Then j ust as t he fig ur e illustrated, the shaded area (AB C ) represents
ecological compensatio n wh ic h sho ul d be paid by coal enterpr ises and the purpose of compensation is to repair
the ecological service losses between Q1 and Q. In practice, the amount that we get fr om Q1 subtracts Q include s
ecological value losses caused by ecological functio n da mage a nd some adverse effects that infl uenc e the dail y
life and develop ment of residents in coal area caused by thos e losses.
But, we can observed that the coal mini ng ac tivities still re sult ecological service damage(Q) even afte r the
coal enterprises paid the co mp ensation wh ich indicated by shaded area in Figure 2. For this par t of damage, t he
coal miners should pay for p ollution charges and ecological damage charges according to thepolluter pays
principlea nd also can restore environment and co nt r o l minin g activities by themse l ves. In thi s way, the eco-
logical compe nsation and po llutio n c ha r ges co uld exist in parallel and coordinated. Tha t is the important theo-
retical and practical significance of Figure 2.
5. Feasib ilit y A na lys is of E cological Compensat ion on Coa l M ining Act ivit ies
In China, the ecological dama ge and envi r o n menta l pollution problems in coal resource cities are serious se-
verely and ecological compensation as an effective economic incent i ve met h o d can sup ervis e r eso urce develop-
ers to restore damaged envi r on ment and pa y for t he d irect vic tims, improve the environment quality, regulate the
relationship b et ween resource development and environmental protection. It is also the effec t i ve way to s o lve
“market failure problem andpolicy failure problem (Kenne t h. J. Arrow, 1969). To implement ecological
compensation in coal resource type cities can ef fectively sol ve t he dual re lationship of material compensation
and va l ue c ompensation of coal resources. Meanwhile, the compensation system also can eliminate the e xt e r na l
non-economy phenomenon by applying financ e measures and other economic polic y instrumen ts.
Currently, the financin g chan ne ls of ecological compensation in China are ver y single whi ch mainly depend
on central financ i a l transfer payment a nd th us increase the pressure of central finance. The ecological compen-
sation fee c o lle c tio n s ys tem and ecology compensation fund operational procedures are not standardized, and t he
super vi s io n s ystem and restraint mechanisms still imperfect. In China, many local gove rnme nts often pa y less
attention on ho w effectively applied ecological compensation f und in environment construction sys tem and how
to improve efficiency of finds utilization. T he coal resource type city can raise enough funds to constr uct and
protect the city and provide basic conditions for the d evelop me nt of new environmental technol ogie s by estab-
lishing ecological compensation mechanism. Meanwhile, this mechanism also can standa r dize and improve the
financ i al security of ecological compensation sys t em, and i ncrease the fund s utilization efficacy and ecological
protection efficie ncy which avoid separation between ecological protection and benefit.
Q Q1
Loss of ecosystem services
Figure 2. Compensation analysis for negative exter-
S. J. Feng et al.
China ha s initia lly established a legal system of environmental protection and mana gem e nt, but the existing
environ me nt legislation is fragmented, lack of systematic legal system and measures regulations, s uc h as ther e
are no clear definition of responsibilities, insufficient laws enforcement, the lower legal status of departmental
regula tio ns and some other issues. Therefore, a prefect and unified compensation system for coal mining a nd to
integrate exis ting taxe s measures may ma ke positive effects on the ecosystem of coal resources cities and max-
imize ecological compensation as an economic environment means whi ch could promote environ ment al protec-
tion and sustainable development in resources city by adj ust interests between vario us i ndi vid ua ls. The eco logi-
cal compensation which was e ngaged in investigating in this article indicates the margina l environment cost
(MEC) of the ecological damage and e nvi r o n menta l p ollution as a consequence of coal resource exploitatio n. In
China , the central gove rnme nt has no t yet prosecute the implement of the ecological c har ge fee. Meanwhile, the
collection efforts of effluent and disposal charges in many coal mining areas are inadequate. Thus, the ecologi-
cal charge fe e ca n be unified into the ecolo gical compensation fee in order to avo i d repeated collectio n of the
costs. Therefore, the ecological compensation on coal mining does not belong to duplicate charges and ther e ex-
ist prer e q uisites for t he establishment of ecological compensation research.
6. Conclusion
Thi s paper bri e fly elaborates the ecological environment currently situation of the coal resource type cities in
China and ana lysi s the feasibilitie s of ecological compensation on coal mini ng acti vities based on its economic
externalities. Eco nomic factors in fact are the o r i gin sources of ecological da ma ge and environmental pollution.
Fro m the aspect of environment econo mics, it is the ecological service value created by ecological protection
activities tha t called positive externality or the ambient pol lutio n a nd ecology damage caused by economic ac-
tivities tha t called ne ga tive e xternality re s ul t t he inc onsi s tency of social cost and private cost. Thus, the ad just -
ment object of the ecological compensation and the establish direction of ecological compensation mechanis ms
are to correct the distributio n relationship b et ween environmental benefits and economic profits.
The approaches for imple me nt ing compensatio n may incl ud e active restoratio n, recreation, enhance ment or
impr o vement of resources. In this paper, compensation can be viewed as a mechanism to ensur e the ecos ystem
services of coal resource type cities over time wh ic h , from an economic prospective, is ofte n referred to as
maint a i ni n g the ur b a n natur a l capitalupon which our eco n omy depends. Eco logical compensation on coal
mini n g ac tivities could be developed further as a tool in the China environmental policy framework. Thro ugh
the e stablishment of ecolo gical compensation mecha nis m can coordinate the co ncer nments of different elements
in the syst em and also can improve the matter energy flowing of the syst em as well as promote the benignit y
circulation of ecological system to a chi eve the o ptimization of the wholly urb an eco logical system.
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