In recent years, grain production has been rising steadily, and the income of farmers has been increasing dramatically, thanks in part to the central government's policy support for agriculture, rural areas and farmers. However, the conventional production mode leads to overconsumption of agricultural resources, increasingly challenging ecological environment impacts, and higher costs of agricultural products whose quality falls short of public expectations. The Central Committee of the Communist Party of China and the State Council both put extra emphasis on agricultural supply-side reform, restructuring of the sector, and a shift in the production mode. This paper explains the significance of the agro-ecological compensation mechanism, analyzes the efficacy of China's current agricultural subsidy policies, introduces related experience from developed countries, elaborates options to establish the mechanism, and proposes policy recommendations to accelerate its development. This analysis concludes that one of the most important approaches to agricultural green development is to shift the existing subsidy policy from one which aims to ensure the yield by purchasing at a protective price, to a green subsidy which focuses on agro-ecological compensation.