Payment For Ecosystem Services — Who Pays And Who Benefits

The Scale of the Problem PES Addresses

Ecosystem services are not a marginal add-on to the economy. The Millennium Ecosystem Assessment (2005) and subsequent analyses have estimated the value of global ecosystem services at $125 to $145 trillion per year — roughly 1.5 times global GDP. These services include provisioning services (food, fresh water, fiber), regulating services (climate regulation, flood control, disease regulation, pollination), cultural services (recreation, spiritual value), and supporting services (soil formation, nutrient cycling, primary production).

Most of this value is not captured in any market and generates no income for the people managing the ecosystems that produce it. A smallholder farmer in the Amazon who maintains forest on their land prevents carbon emissions, supports biodiversity, and regulates regional rainfall patterns — generating value for people in São Paulo, in Miami, and in Bangladesh. That farmer receives nothing for this service and faces significant economic pressure to clear the land.

PES Program Architecture

PES programs vary enormously in design, and those design differences determine who benefits.

Government-funded PES programs include Costa Rica's pioneering Pagos por Servicios Ambientales (PSA) program, launched in 1997, which pays landowners for carbon sequestration, biodiversity maintenance, water regulation, and scenic beauty. Mexico's national PES program, PSAH, similarly pays landowners in priority watersheds for hydrological services. Ecuador's Socio Bosque program has enrolled millions of hectares of indigenous and community-held land in payments for conservation. China's Sloping Land Conversion Program, one of the largest land retirement programs in history, paid farmers to convert erodible cropland to forest or grassland.

Buyer-funded arrangements work differently. Hydroelectric companies that need reliable water flow pay upstream communities to maintain forest cover. Urban water utilities pay for upland land management. These arrangements can be efficient and effective when interests genuinely align, but they create private bilateral arrangements with less transparency and accountability than public programs.

The voluntary carbon market and biodiversity credit markets represent a third category — private market mechanisms where corporations purchase credits as offsets against their own environmental impacts. This category has attracted the most investment capital and generated the most controversy.

Costa Rica: The Success Case and Its Limits

Costa Rica's PSA program is genuinely impressive. From 1987 to 2007, Costa Rica went from net deforestation to net reforestation — from losing roughly 50,000 hectares per year to gaining forest cover annually. The PSA program, which paid landowners in US dollars per hectare for maintaining or restoring forest, is credited with a significant portion of this reversal, alongside a simultaneous ban on forest conversion.

But the success story has complications. Rigorous econometric analysis has found that PSA payments in Costa Rica often went to landowners who would have maintained forest anyway — areas with low agricultural opportunity cost, steep slopes, poor soils, or existing conservation interest. Additionality — the requirement that payments induce conservation that would not otherwise have occurred — has been difficult to establish. Pagiola et al. (2005) and subsequent researchers found that program participation was strongly correlated with characteristics that already favored forest retention, suggesting that payments were partly rewarding behavior that would have happened regardless.

This does not mean the program failed. Payments that reach willing land stewards and stabilize their management still produce outcomes. But it does mean that cost-effectiveness is not as high as the headline numbers suggest, and that hard cases — converting forest with high agricultural value — were largely not solved by payments.

Power in PES Arrangements

The sovereignty question in PES centers on who sets the terms. In any payment arrangement, the party offering payment has structural power over the party receiving it. If that power differential is large — as it is between a multinational corporation purchasing carbon credits and a smallholder farmer in the Global South — the receiving party may face pressure to accept terms that do not fully serve their interests.

Indigenous communities have been particularly vulnerable to poorly structured PES arrangements. REDD+ (Reducing Emissions from Deforestation and Forest Degradation), the UN framework for forest carbon payments, has generated significant controversy around cases where payments for forest conservation have come with restrictions on traditional land uses — controlled burning, selective harvesting, seasonal hunting — that indigenous communities have practiced for generations. The conservation interest, defined by external parties, sometimes conflicts with the land management practices that have actually maintained forest cover across centuries.

This is the structural paradox of PES: the people whose land management generates the ecosystem service are often those with the least power to define the terms on which they are compensated for providing it. When external actors — governments, corporations, conservation organizations — design PES programs, they encode their own assumptions about what "good" land management looks like, which may or may not align with the practices of the people who have been managing the land.

The Financialization Risk

As PES mechanisms have matured, they have attracted financial intermediaries seeking investment returns, and this introduces dynamics that can undermine program integrity.

Biodiversity credits, carbon credits, and "natural capital" instruments are increasingly being packaged into financial products — bonds, funds, structured instruments — that allow institutional investors to claim exposure to conservation assets. The financial logic is compelling: conservation generates long-term value, and investors should be able to participate in that value creation while directing capital toward it.

The problem is that financial intermediation adds layers between the capital and the land, and each layer has its own incentives that may not align with conservation outcomes. A fund manager who needs to report returns to investors quarterly has different time horizons than a watershed that requires a century of management. Pressure to show financial performance can drive toward crediting practices that look good on paper without requiring genuine ecological improvement.

The Natural Asset Company concept, briefly approved and then rejected by the New York Stock Exchange in 2024 after political controversy, would have allowed companies to list "nature" as an asset on the balance sheet — trees, watersheds, biodiversity — and issue shares against it. Critics argued this would effectively allow Wall Street to acquire nature at scale using conservation as the financial rationale, without guaranteeing that actual conservation outcomes improved.

Designing PES for Sovereignty

PES programs that have best served land managers and ecosystems share several design characteristics.

Community-controlled programs — where the communities managing land have genuine decision-making authority over program design, monitoring, and payment distribution — have outperformed externally designed programs in both conservation outcomes and equity. Mexico's community forestry program, which predates PES frameworks and has been integrated into them, gives ejidos (community land-holding organizations) collective control over forest management and revenue distribution. Communities that have controlled their own forestry for decades have consistently outperformed private and government-managed forests in Mexico on both conservation and economic outcomes.

Direct payments with minimal intermediation — where the entity generating the service is paid directly by the entity receiving it, without multiple layers of certification and intermediation — have lower transaction costs and allow more of the payment to reach land managers. The New York City-Catskill arrangement works because the relationship between payer and service provider is direct and the interests are genuinely aligned.

Flexibility to accommodate traditional practices — where PES contracts allow continued use of traditional land management methods rather than imposing externally defined "pristine" management regimes — have better conservation outcomes and stronger community buy-in. Fire management by indigenous communities in Australia has been incorporated into carbon payment programs in ways that allow traditional burning practices while still delivering measurable carbon and biodiversity outcomes.

Additionality verified by historical baseline — where payments are conditioned on measurable improvement from a documented baseline, not just maintenance of already-good conditions — directs resources toward harder cases and reduces the risk of paying for business-as-usual.

The Planning Principle

Payment for ecosystem services is a legitimate and sometimes powerful tool for aligning economic incentives with ecological outcomes. Its value depends entirely on whether the people managing the ecosystems have sufficient power in program design to ensure that payments serve their interests, not just the interests of buyers, intermediaries, or the conservation frameworks imposed by external parties.

For any household, community, or polity considering PES participation: the relevant questions are not whether to participate in principle, but who designed the program, who monitors compliance, what happens if circumstances change, how long the obligation runs, and what the net payment is after all transaction costs. A PES arrangement that generates meaningful income while preserving management flexibility is a genuine sovereignty asset. One that creates long-term obligations, constrains land use, and delivers most of its value to intermediaries is a debt trap in conservation clothing.