Abstract: At the end of the 1990s China started to construct an ecological compensation system for national key ecological function areas. An eco-compensation system focusing on the “Transfer Payment of National Key Ecological Function Areas” has been established. The current eco-compensation system has played a positive role in improving the ecological environment of national key ecological function areas; but the ecological effect is weakening due to existing problems in the eco-compensation system such as unreasonable calculation of compensation standards, poor expression of rights and interests of stakeholders, simple sources of capital and modes of compensation. For better development, the eco-compensation system should be improved by (i) adhering to the combination of vertical compensation (oriented) and horizontal compensation (auxiliary) on the whole and establishing a transfer payment system of eco-compensation at national scale; (ii) defining the compensation standard according to ecological protection costs, development opportunity costs and ecological service values and adding indicators that reflect economic green transformation to evaluate compensation effects; (iii) gradually building a utilization system of eco-compensation funds in which multi-stakeholders participate and establishing a green development-oriented system to evaluate the performance of local governments; and (iv) cultivating a new business pattern where ecological services are the product, to grow the ecological service industry.