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Payment for Environmental / Ecosystem Services (PES schemes)

In the past decade, payments for ecosystem service (PES) schemes have represented a growing trend in conservation policy, developing rapidly in both developed and developing countries around the world (Wunder et al., 2008). There are different types of payments for environmental services schemes:

(a) Direct payment schemes: The government pays landowners, on behalf of civil society, and sometimes with contributions from the private sector, to adopt improved land management options and thus address a particular environmental problem.

(b) Product-based PES schemes: Consumers pay a ‘green premium’ in addition to the market price of a product or service, in order to ensure an environmentally friendly production process and the protection of environmental services, which is verified through independent certification.

They develop mainly around three groups of environmental services:

  • Water quality and quantity, often including soil conservation measures in order to control erosion and sediment loads in rivers and reservoirs and to reduce the risk of land slides and flooding;
  • Carbon sequestration (and in some cases protection of carbon storage) to respond to demand from the voluntary and regulatory greenhouse gas emissions markets;
  • Biodiversity conservation, by sponsoring the conservation of areas of important biodiversity (in buffer zones of protected areas, biological corridors or even in remnant patches of native vegetation in productive farms) and protecting agricultural biodiversity.

PES is sometimes referred to as a ‘market-based instrument’ or a ‘market for ecosystem services’, since it is basically a new type of subsidy, but unlike traditional subsidies, which are financed by taxpayers at large, payments can be financed directly and voluntarily by the beneficiaries (users) of the ecosystem services PES help maintain. They are applied at different scales, ranging from micro-watersheds to entire watersheds that may cut across state, provincial or national boundaries. In Costa Rica, a countrywide programme has been implemented since 1997. A government agency is in charge of this programme as a representative of the beneficiaries. All landowners that produce one of the ecosystem services listed in the law are potential participants of the programme. In other places, small-scale programmes have been developed to solve specific problems such as water provision: water consumers in a locality pay landowners upstream to protect watersheds (Echavarria et al., 2004) Such programmes can be seen as successful examples of Coasian bargaining.

Payments for ecosystem services should not be seen as an end in itself, but it is a policy tool with several advantages:

  •  Potential to raise awareness of the values of biodiversity and ecosystems.
  •  Opportunity to engage previously uninvolved actors (especially in the private sector) in conservation activities.
  • Opportunities for communities to improve their livelihoods through access to new markets.
  • Potential platform to integrate conservation and climate efforts into a common policy framework.
  • Potential to increase collaboration amongst Multilateral Environmental Agreements, in the international context.
  • Facilitates the transition from an economy of production to an economy of stewardship.

While the principles are clear, however, designing and implementing a system of payments for environmental services in practice is often difficult. PES programmes in place differ substantially, reflecting the adaptation of the basic concept to very different ecological, socio-economic or institutional conditions, as well as design options, sometimes as a consequence of mistakes or the need to accommodate political pressures. PES can be viewed from ‘urban–rural’, ‘upstream–downstream’, ‘North–South’ and ‘core–periphery’ perspectives.

Echavarria et al. (2004) describe a PES development process in ten steps, which may not be sequential: (1) identify a situation where there is a ‘seller’ and ‘buyer’ of an environmental/ecological service; (2) create the institutional capacity to implement a market mechanism; (3) develop inter-institutional links; (4) know what is going to be sold; (5) develop and implement a negotiation strategy with the political decision-makers; (6) develop environmental education projects for the communities; (7) develop a formal and transparent organizational structure for decision making and implementation; (8) establish an appropriate payment system; (9) monitor and evaluate the process and (10) make corrections and reinforce successful measures.

Gómez-Baggethun et al. (2009) point out that the focus on monetary valuation and payment schemes has contributed to attract political support for conservation, but also to commodify a growing number of ecosystem services and to impose the market logic to tackle environmental problems. It is argued that PES may become counterproductive. Assume that the service (for instance, water supply from the highlands) was supplied as a matter of course and as a social obligation for free. When a system of payment is introduced to guarantee quantity and quality of water, the logic has changed. If the payments are now seen as insufficient from an economic point of view (not compensating for the opportunity costs) appeals to social obligation will be useless.

A critical dimension of PES systems concerns their impact on the poor. According to Pagiola et al. (2005), PES may reduce poverty by making payments to poor natural resource managers. Although PES programmes are not designed for poverty reduction, there can be important synergies when programmes design is well thought out and local conditions are favourable. However, payment mechanisms are limited for addressing issues of equity (Echavarria et al., 2004). In fact, they may eventually lead to changes in property rights against the poor or against indigenous groups (Kosoy et al., 2007). There is great concern today that REDD schemes may lead to de facto expropriation of indigenous forests.

Previous experience with incentive-based approaches suggests that it is unlikely that a PES approach will always be able to simultaneously improve livelihoods, increase ecosystem services and reduce costs. Potential tradeoffs among these goals can arise and must be assessed (e.g. Kosoy et al., 2007; Jack et al., 2008).


Echavarria, M., Vogel, J., Albán, M., Meneses, F. (2004) The impacts of payments for watershed services in Ecuador – emerging lessons from Pimampiro and Cuenca. International Institute for Environment and Development (IIED), Environmental Economics Programme, London, UK.

Gómez-Baggethun, E., de Groot, R., Lomas, P., Montes, C. (2009) The history of ecosystem services in economic theory and practice: From early notions to markets and payment schemes, Ecological Economic, 69(6), 1209-1218.

Jack , B.K., Kousky, C. and Sims, K.E. (2008) Designing payments for ecosystem services: lessons from previous experience with incentive-based mechanisms. Proceedings of the National Academies of Sciences of the United States of America 105: 9465–9470.

Kosoy, N., Martínez-Tuna, M., Muradian, R., Martínez-Alier, J. (2007) Payments for environmental services in watersheds: insights from a comparative study of three cases in Central America, Ecological Economics, 61, 446-455.

Pagiola, S., Arcenas, A., Platais, G. (2005) Can payments for environmental services help reduce poverty? An exploration of the issues and the evidence to date from Latin America. World Development 33(2), 237-253.

Wunder, S., Engelb, S., Pagiola, S. 2008. Taking stock: A comparative analysis of payments for environmental services programs in developed and developing countries, Ecological Economics, 65, 834-852.

For further reading

IUCN (2008) Designing Payments for Ecosystem Services. Report from the East Asian Regional Workshop (Hanoi, April 2008).

Wunder, S. (2007) Efficiency of Payments for Environmental Services, Conservation Biology, 21(1).

Rodríguez-Labajos, B., Martínez-Alier, J. 2012. Issues in the economics of ecosystems and biodiversity. Recent instances for debate. EJOLT Report No. 5, 48 p. Available at


This glossary entry is based on a contribution by Rui Santos

EJOLT glossary editors: Hali Healy, Sylvia Lorek and Beatriz Rodríguez-Labajos

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