Effects of environmental regulation on rural livelihood diversification: Evidence from pastoral China

Previous studies on rural livelihood diversification primarily focused on its determinants and the role of cash transfers. However, little attention has been paid to the effects of environmental regulation schemes on rural livelihood diversification. This study ascertains the impact of China's Grassland Ecological Compensation Policy (GECP) on the income-generating activities and livelihood diversification of its rural recipients. We use a unique national representative survey of 722 herder households in pastoral China. A seemingly unrelated Tobit model is estimated to simultaneously account for the censored nature of the livelihood diversification of recipients and the correlation of error terms of the different livelihood activities. A latent class cluster analysis is performed to split samples into four clusters according to the characteristics of their livelihood strategies. We find a U-shaped relationship between livelihood diversification and GECP subsidies, such that the livelihood diversification index (excluding cash transfers) decreases or increases when the GECP subsidy is below or above 89,500 yuan, respectively. The present compensation levels are far below the turning point, implying that the scheme fails to achieve its objective of diversifying herders' livelihoods into off-farm sectors. Further, the herders' livelihood diversification index increased when cash transfers were included but decreased when they were excluded, reflecting the vulnerability of herders' livelihoods and their strong reliance on the compensation. Finally, the sub-group analysis reveals that cash transfers only influence the livelihood diversification of full-time, but not part-time, pastoralist households. • First study to empirically investigate the impact of environmental regulation on rural livelihood diversification. • Herders invested compensation in livestock production , undermining the objective to regulate animal grazing. • Herders' overall incomes increased with compensation, but their livelihoods are strongly reliant on the compensation. • A U-shaped relationship between livelihood diversification index (excluding cash transfers) and compensations. • The undifferentiated and un-targeted compensation scheme has compromised cost-effectiveness.