Payments for environmental services (C7.06)


In order to ensure water security, decision makers can not only penalise harmful behaviour, they can also reward beneficial actions. The most common way to do this is through subsidies. Payments for Environmental Services (PES) are a specific type of those. The FAO (2007) has defined Payment for Environmental Services as follows: “PES transactions refer to voluntary transactions where a service provider is paid by, or on behalf of, service beneficiaries for agricultural land, forest, coastal or marine management practices that are expected to result in continued or improved service provision beyond what would have been provided without the payment.”

In the context of water, PES can be used to persuade users of land or other natural resources to modify their behaviour so as to protect and enhance water resources (e.g. shifting to organic farming, converting arable land to pasture, planting trees). PES may compensate them for the extra effort and/or financial cost involved in changing their behaviour.

The funding for PES may be provided by governments, international agencies, local communities, water companies, hydro-power producers, flood protection agencies, or private companies, depending on the type of benefits expected and their impact. In some cases, the cost can be passed on to final consumers (e.g. in the higher price of products cultivated organically or sustainably).

In many circumstances, PES may be a more effective and efficient method of managing water resources compared to its alternatives. These typically entail major outlays on water treatment, flood control, and the development of new sources. For example, improving the quality of raw water is normally preferable to investing in costly treatment works (e.g. the New York case cited below), and may be vital for the preservation of brand image (Vittel case below).

There are at least three prerequisites for implementing PES: an effective supply and demand of the targeted ecosystem services; supportive intermediary organisations to facilitate the PES mechanism; and supportive national conditions (e.g. policies that promote secure property rights and market exchange).

PES recognises the fact that the task of environmental stewardship is widely dispersed throughout society. Getting it done at the source by enlisting key stakeholders can be effective, efficient and fair. Even though PES was not intended to reduce poverty, there are a number of ways that PES programmes can be set up to benefit the poor. For example, direct benefits may be generated through payments to poor people who are the suppliers of ecosystem services. These payments can be monetary or non-monetary. PES programmes may additionally bring indirect benefits such as social capital and political voice, or technical training.

Some examples of PES in action:

  • The city of New York opted to support farmers carrying out watershed protection upstream in the Catskill Mountains in order to reduce the high cost of treating water downstream closer to the city.
  • Nestle, a multinational drinks company, operates a scheme for subsidising farmers to avoid the use of nitrates in the area from which its bottled water Vittel is drawn.
  • In Quito, Ecuador, and in several smaller cities in Honduras and Costa Rica, the water utility and electric power companies pay local people to conserve the watersheds from which water is drawn.
  • In Venezuela the power producer CVG-Edelca pays a proportion of its revenues towards the preservation of the Rio Caroni watershed.
  • Brazil has a Water Producer Programme through its National Water Agency that compensates farmers for safeguarding critical headwaters for the Sao Paulo Metropolitan region.

Lessons learned

Experience with PES shows that it is most likely to succeed where the following conditions are present:

  • There is a clear demand (need) for ecosystem services, which have financial value to one or more stakeholders;
  • Provision of ecosystem services is threatened;
  • Specific resource management actions offer feasible solutions;
  • Effective brokers or intermediaries exist;
  • Resource tenure is clear and contracts can be enforced;
  • Outcomes of actions can be independently monitored and evaluated.