The sustainable development effects of vertical ecological compensation: evidence from China's interregional gaps

This study examines the effects of China's vertical ecological compensation (VEC) policy on regional income redistribution, with particular focus on the social dimension of sustainable development. Using county-level data from 2005 to 2022, we employ the staggered difference-in-difference strategy based on the establishment of the national key ecological function zones (NKEFZs) in China. The estimates imply that the VEC policy significantly reduces the Theil index between ecologically fragile and non-fragile regions by about 0.0333, indicating a substantial reduction in income inequality. The redistributive effect of the VEC policy is stronger in non-border counties, areas far from rivers, high-altitude counties, and water-related ecological function zones. Interestingly, the redistributive effects mainly come from ecological fiscal transfers, ecological industry growth, and agricultural modernization. We demonstrate that by improving income distribution, the VEC policy can serve as an important pathway toward sustainable development in emerging economies.