Payments for Ecosystem Services are financial mechanisms that reward landowners and managers for conservation work, from carbon sequestration to biodiversity protection. These schemes recognise nature's intrinsic value and create economic incentives for environmental stewardship across farms, forests, and wetlands worldwide.
Farmers across the UK are increasingly being paid to protect hedgerows, wildflower meadows, and other habitats through ecosystem services schemes
For too long, the world has treated nature as a free resource. We've harvested timber, water, and carbon from ecosystems without recognising their true value or compensating those who protect them. Payments for Ecosystem Services are changing this equation. By putting a financial value on the benefits nature provides—clean water, carbon storage, pollination, flood regulation, and biodiversity—PES schemes create powerful incentives for conservation. Farmers can be paid to restore hedgerows. Forest owners can generate income from carbon credits. Wetland managers can access funding for habitat restoration. These mechanisms link profit to protection, turning conservation economics inside out.
The market is growing rapidly. The UK voluntary carbon and nature markets are projected to reach £5–20 billion by 2030, expanding to £60–270 billion by 2050. Yet PES remains misunderstood by many conservationists and policymakers. Some criticise PES as commodifying nature; others see it as pragmatic, essential economics. The truth is nuanced: PES schemes are powerful tools when well-designed, but they carry real risks if poorly implemented. Understanding how these mechanisms work, why they matter, and where they fall short is essential for anyone concerned with protecting the natural world in the 21st century.
£26.85
Average carbon credit price (UK Woodland Carbon Code 2024)
38,705 ha
UK Woodland Carbon Code projects validated to date
£596/ha
Top rate for buffer strips under Sustainable Farming Incentive
2,520 km
Water courses enhanced by UK Countryside Stewardship
Payments for Ecosystem Services are financial transactions in which beneficiaries of ecosystem services pay those who manage or protect the ecosystems providing those services. They bridge the gap between conservation values and market economics, converting environmental stewardship into revenue streams that make conservation financially viable for landowners and communities.
Every ecosystem provides multiple services: forests store carbon and filter water; wetlands regulate floods and provide habitat; grasslands support pollinators and livestock forage; riparian strips prevent soil erosion and filter agricultural runoff. For centuries, these services were assumed to be infinite and free. We now understand they are finite, increasingly degraded, and economically valuable. PES mechanisms work because they align economic incentives with environmental outcomes. A farmer protecting a hedgerow is paid because that hedgerow sequesters carbon, provides wildlife habitat, and filters water. A forester planting native species earns carbon credits as those trees grow. A wetland manager receives payment for maintaining water quality and flood storage. The payment makes the conservation activity profitable.
PES schemes take multiple forms, from government-funded agri-environmental subsidies to voluntary carbon markets, from mandatory biodiversity offset requirements to payments for water quality improvements. What unites them is the principle: compensate people for delivering measurable environmental benefits. As we explore in our guide on what ecosystem services are, these services are fundamental to human wellbeing, and protecting them through PES makes both ecological and economic sense.
Source: UN Environment Programme; TEEB (The Economics of Ecosystems and Biodiversity) 2023
PES schemes operate across a spectrum of mechanisms, from government mandates to voluntary markets. Each type addresses different environmental challenges and suits different stakeholders. Understanding this diversity helps us recognise PES as a toolkit rather than a single solution.
Forests earn carbon credits as they sequester CO2, creating direct income for landowners
Carbon credits remain the most developed PES mechanism globally. Projects that reduce or sequester greenhouse gas emissions generate credits representing one tonne of CO2 equivalent. Buyers—corporations seeking to offset emissions, or governments meeting climate commitments—purchase these credits. The UK Woodland Carbon Code has validated 762 projects covering 38,705 hectares, with average carbon prices rising from £11.02 per tonne in 2020 to £26.85 in 2024. Woodland owners who plant native species or manage existing forests for carbon sequestration receive payment as their trees grow and absorb atmospheric carbon.
Carbon credit schemes create long-term incentives. Projects typically run for 30–40 years, ensuring sustained management and income. However, carbon markets face challenges: questions over real additionality (whether projects would occur anyway), leakage (emissions displaced rather than reduced), and the quality of carbon methodologies. Recent research has questioned whether some carbon offsets deliver genuine climate benefits, emphasising the need for robust monitoring and independent verification.
Source: Woodland Carbon Code Registry 2024; Nature Climate Change review of carbon markets
Biodiversity offsetting allows developers to damage habitats on one site whilst funding habitat creation or restoration elsewhere. This is distinct from avoiding and mitigating damage at source. In the UK, the mandatory Biodiversity Net Gain policy (BNG) requires development projects to deliver a net 10 per cent increase in biodiversity value. Within eighteen months of mandatory implementation, 112 BNG projects were registered, promising over 4,000 hectares of enhanced and created habitat. However, research indicates rapid biodiversity metrics based purely on habitat area may not translate into real species-level biodiversity gains—grasslands mature quickly and generate credits, but complex ecosystems like ancient woodlands are harder to quantify and compensate for.
BNG generates revenue for habitat managers and conservation organisations. Habitat bankers invest in land and coordinate habitat creation, then sell credits to developers facing compliance obligations. This has created new funding streams for conservation, though concerns persist about whether rapid-growing, low-diversity habitats are genuine alternatives to lost ancient ecosystems. Learn more about the mechanics in our article on biodiversity net gain defined.
Source: UK Environment Agency Biodiversity Net Gain Register; Defra BNG Policy 2024
Wetland mitigation banking operates similarly to biodiversity offsetting but specifically addresses water quality and flood regulation. Developers who must compensate for wetland loss can purchase credits from restored or created wetlands. These schemes exist across North America and are emerging in Europe. Water quality trading allows polluters (agriculture, industry) to meet regulatory standards by purchasing credits from landowners who reduce nutrient runoff or restore riparian vegetation. A farmer installing buffer strips or riparian zones that filter agricultural runoff earns credits from improved water quality, which can be sold to agricultural cooperatives or industrial polluters facing regulatory compliance costs.
The UK Countryside Stewardship scheme has enhanced and protected 2,520 kilometres of water through implementation of conservation measures. These include riparian buffer strips, wetland restoration, and sustainable grazing practices that reduce diffuse pollution. Farmers participating receive payments for the water quality improvements their land delivers.
Source: UK Countryside Stewardship Annual Report 2024; USEPA Water Quality Trading Database
Farmers are paid directly to restore hedgerows and create wildlife habitats under UK agri-environmental schemes
Government-funded agri-environmental schemes represent the most direct form of PES. The UK's Sustainable Farming Incentive (SFI) pays farmers between £151 per hectare for low-input permanent grassland and up to £596 per hectare for buffer strips and tree-lined watercourses. Annual agreement limits of £9,300 per farm under the 2024 expanded offer ensure accessibility for smaller operations whilst incentivising ambitious conservation.
The predecessor Countryside Stewardship scheme has delivered 2,520 kilometres of enhanced water courses, thousands of hectares of habitat restoration, and measurable improvements in biodiversity and water quality. These schemes work because they don't rely on market demand—governments fund them as public goods investment. They create the certainty that enables farmers to make long-term commitments to conservation. Scotland's peatland restoration programmes exemplify this: £35.5 million investment in 2025–26 (a 32 per cent increase from the prior year) restored 14,860 hectares in 2024–25 alone. England's Nature for Climate Peatland Grant Scheme restored 4,894 hectares in 2023–24, with cumulative restoration reaching 15,658 hectares since 2020–21. These are major landscape-scale conservation achievements that depend entirely on government PES funding.
Source: Defra Sustainable Farming Incentive 2024; Scottish Government Peatland Grant Scheme
The mechanics of PES vary by scheme type, but the underlying logic is consistent: identify an ecosystem service, measure it, pay someone to provide or enhance it, and verify delivery. Understanding this journey from identification to payment to verification helps explain both why PES works and where it can fail.
The process begins with identifying which ecosystem service has value and is currently undervalued or degraded. This might be carbon sequestration in forests, water quality improvement through riparian vegetation, or habitat for pollinators on farmland. The service must be measurable and must be something the landowner can influence through management changes.
Establishing a baseline is critical: how much of the service was being delivered before the PES scheme began? For carbon, this means calculating the carbon stock in existing vegetation and estimating sequestration rates from project models. For biodiversity, it means surveying existing habitat quality before work begins. For water quality, it means measuring nutrient levels before and after riparian restoration. Reliable baselines prevent payment for work that would have happened anyway—a principle called "additionality."
Landowners implement the agreed conservation work: planting trees, restoring wetlands, managing grasslands, installing riparian buffers. Throughout the project period—often 30–40 years for carbon, or the duration of the farming agreement for agri-environmental schemes—progress is monitored. Carbon sequestration is tracked via periodic surveys or remote sensing. Biodiversity is measured through species surveys or habitat extent assessments. Water quality is tested through chemical analysis and ecological surveys.
As the ecosystem service is verified to be delivered, credits are generated. One carbon credit equals one tonne of CO2 equivalent sequestered. One biodiversity credit might represent a hectare of habitat created at a specified quality level. One water quality credit might represent a specific reduction in nutrient runoff. These credits are then sold or claimed, generating payment for the landowner. Under government schemes like SFI or Countryside Stewardship, payment is direct: farmers receive an annual payment for maintaining agreed conservation. Under market-based schemes, the landowner (or an intermediary like a habitat banker) sells credits to buyers seeking to offset emissions or meet compliance obligations.
As we note in our article on biodiversity and conservation, the key to effective PES is ensuring that payments genuinely drive additional conservation effort that wouldn't otherwise occur. This requires rigorous additionality testing, careful baseline setting, and robust monitoring.
Source: World Bank PES Guidelines; TEEB Payments for Ecosystem Services Manual
Key Point on Verification
Verification is expensive and labour-intensive but essential. A poorly verified PES scheme risks funding conservation that never delivers, or worse, creating perverse incentives where payments reward degradation disguised as improvement.
PES schemes operate across the world, from tropical rainforests to temperate farmland. Examining successful examples reveals what works and offers lessons for scheme design.
Costa Rica's forest protection schemes have helped reverse deforestation and regenerate tropical rainforest
Costa Rica established the world's first national PES programme in 1997. Recognising that deforestation was stripping the country of biodiversity and carbon sinks, the government created the Payments for Environmental Services (PSA) scheme. Landowners are paid for forest conservation, reforestation, and sustainable forest management. The programme has protected and restored hundreds of thousands of hectares, reversing decades of deforestation. Forest cover in Costa Rica increased from 21 per cent in the 1980s to 52 per cent today, representing an extraordinary conservation success story.
Costa Rica's scheme works because payments are substantial (enough to compete with alternative land uses), long-term (multi-year contracts provide certainty), and unconditional (once land is enrolled, payment is not withheld for minor compliance issues, reducing farmer risk). The programme has also prioritised equity: payments are structured to support smaller landowners and indigenous communities, not just wealthy investors.
Source: Costa Rica Environment Ministry; Wunder 2008, Payments for Environmental Services
REDD+ is a global mechanism that pays developing countries for reducing forest loss below historical baseline rates. Rather than paying individual landowners, REDD+ channels payments to national governments based on verified reductions in deforestation. This addresses a critical problem: in many developing countries, deforestation generates immediate income for loggers and farmers, whilst carbon storage benefits accrue globally and across decades. REDD+ rebalances this equation by making forest protection economically competitive with deforestation.
REDD+ has supported forest protection across Indonesia, Congo Basin, and Amazon countries. However, the mechanism faces challenges: establishing reliable baselines is difficult in countries with poor historical data; verifying reductions in a satellite-based system is complex; and payments remain unpredictable—countries don't know how much funding they'll receive until performance is verified. Despite these limitations, REDD+ represents a significant commitment to valuing forest carbon as a global public good.
Source: UN-REDD Programme; World Bank Forest Carbon Partnership Facility
The UK's Countryside Stewardship scheme (now being phased out in favour of the Sustainable Farming Incentive and Local Nature Recovery strategies) has delivered measurable conservation outcomes over two decades. The scheme has protected and enhanced 2,520 kilometres of water courses, restored thousands of hectares of grassland and heathland, and installed over 100,000 hectares of conservation features (hedgerows, buffer strips, beetle banks) across farmed landscapes.
The scheme's success lies in its integration with farming. Rather than imposing conservation as a regulatory burden, PES payments make conservation economically viable within existing farming systems. A farmer can maintain his business whilst also protecting habitat and water quality. This pragmatism has enabled participation from thousands of farms, creating landscape-scale conservation impact. The newer Sustainable Farming Incentive aims to continue this momentum with higher payment rates and simpler applications.
Source: Defra Countryside Stewardship Results 2024; Natural England Evaluation
PES schemes have undeniable successes, but they face legitimate criticisms. Understanding these limitations is essential to implementing PES responsibly and recognising where complementary approaches are needed.
Some conservationists argue that PES commodifies nature—turning intrinsic ecological and spiritual values into trading tokens. If we only protect nature because it's profitable, what happens when the economics change? This is a profound philosophical concern. However, pragmatically, we live in market economies. PES doesn't replace the moral case for conservation; it supplements it, making conservation economically defensible. The real question isn't whether to commodify nature, but whether to harness commodity markets as tools for conservation, recognising their limitations.
A critical weakness in many PES schemes is difficulty in establishing true additionality. Did the landowner implement conservation because of the payment, or would they have done it anyway? If payment is provided for conservation that would have occurred regardless, public or private funds are wasted on no additional environmental benefit. Establishing reliable baselines is technically difficult, expensive, and opens the door to manipulation. Some landowners might deliberately degrade land before a PES programme begins, creating an inflated baseline against which to claim large improvements. This "greenwashing" is a persistent risk.
Leakage occurs when conservation in one place simply displaces damaging activity elsewhere. A forest owner receives payment for protecting forest A, but deforestation then accelerates in forest B as loggers shift attention. Similarly, in REDD+ schemes, protecting forest in one country may lead to increased deforestation pressure in another as global timber demand remains constant. Measuring and preventing leakage is one of the most difficult aspects of PES design.
PES schemes depend on measurable metrics, but ecological value doesn't always correlate with what's easy to measure. The UK's biodiversity net gain system relies on habitat area and condition assessments, yet research shows this habitat-based metric is an ineffective proxy for actual species-level biodiversity outcomes. Rapidly-maturing habitats like grasslands dominate BNG portfolios because they generate credits quickly, whilst more complex ecosystems like ancient woodlands and wetlands, which may support greater species diversity, are harder to quantify and recreate quickly. This creates perverse incentives where conservation prioritises what's measurable rather than what's ecologically valuable.
Market-based PES schemes (carbon markets, voluntary offset schemes) are subject to price volatility and demand uncertainty. A forest owner cannot reliably predict income from carbon credits a decade hence. Carbon prices have ranged from £5 to over £40 per tonne in recent years. This uncertainty deters investment. Government-funded schemes (like SFI or Countryside Stewardship) provide greater certainty because payment levels are set by policy, but they require sustained public funding. Both approaches have limitations: market schemes offer potential for scale but lack certainty; government schemes provide certainty but depend on political commitment and budget availability.
Despite these criticisms, the evidence suggests PES works when well-designed. Costa Rica's forest recovery, Scotland's peatland restoration, and UK water quality improvements all demonstrate that PES can deliver real conservation outcomes. The key is honest acknowledgement of limitations and complementary use of regulations, protected areas, and support for communities whose livelihoods depend on conservation.
Source: Angelsen et al. 2012; IPCC Report on Market-Based Mechanisms
Biodiversity Net Gain is one of the newest and most significant PES mechanisms in the UK. As we explain in our article on biodiversity net gain defined, BNG requires all developments to deliver a 10 per cent net improvement in biodiversity. This creates a mandatory PES market: developers must either restore habitat on-site or purchase credits from off-site habitat banks and conservation organisations.
BNG creates funding for habitat restoration by linking it to development obligations
BNG generates revenue for conservation. Habitat bankers invest capital in acquiring land and restoring habitats, then sell credits to developers at £5,000–£50,000 per credit depending on habitat type and location. This has unlocked new funding for conservation organisations and land trusts, who can now generate revenue from habitat restoration that was previously dependent on grant funding. In its first eighteen months, BNG generated £206,180 from statutory credit sales—a modest figure that reflects the early stage of the market, but signals rapid growth as more projects are registered.
The future of PES in the UK and globally likely involves expanding and integrating multiple mechanisms. Carbon markets will mature as methodology improves and corporate climate commitments drive demand. Biodiversity offsetting will grow as nature-related financial risk becomes recognised by investors and regulators. Government schemes like the SFI and Local Nature Recovery strategies will continue funding landscape-scale conservation in areas where market-based PES cannot work. The role of policy is to coordinate these mechanisms, ensuring they complement rather than undermine one another, and that conservation is driven by ecological priorities rather than mere market convenience.
Understanding climate change impacts on biodiversity is essential in designing PES that are climate-resilient. As we explore in our article on climate change and biodiversity, ecosystems themselves are shifting. PES schemes must account for future climate conditions, not historical baselines. A forest planted for carbon sequestration in the UK must be resilient to future warming and drought. A wetland restored for water quality must tolerate future flooding patterns. Climate-adaptive PES is the future.
Source: UK Environment Agency BNG Register 2025; Defra Local Nature Recovery Strategy Guidance
For readers seeking to deepen their knowledge of PES, a range of resources exists:
For a deeper understanding of how PES fits within broader conservation frameworks, explore our guide to causes of biodiversity loss and the importance of the importance of biodiversity. PES is one tool among many—essential, but not sufficient on its own.
PES is a broad category of mechanisms that financially reward ecosystem service delivery. Biodiversity offsetting is a specific type of PES where impacts to habitat in one location are compensated by habitat creation or restoration elsewhere. All biodiversity offsetting is PES, but not all PES is offsetting—carbon sequestration and agri-environmental payments are PES but not offsetting because they don't necessarily compensate for damage elsewhere.
Sustainable Farming Incentive payments range from £151 per hectare for low-input permanent grassland to £596 per hectare for buffer strips and tree-lined watercourses. Individual farmers are limited to £9,300 in annual payments under the 2024 expanded offer, though larger operations or those implementing multiple actions can potentially earn more. Payments vary by action and region.
Carbon credits can provide reliable income if purchased under long-term agreements, but prices are volatile. UK Woodland Carbon Code prices averaged £11.02 per tonne in 2020 but rose to £26.85 by 2024. Forward sales agreements can lock in prices, reducing risk, but landowners must wait for credits to be validated before receiving payment. Government schemes like SFI provide more certain income but may offer lower per-hectare rates than carbon markets.
Well-designed PES schemes with robust baselines, additionality testing, and independent monitoring deliver genuine conservation. Costa Rica's forest protection and UK water quality improvements are documented successes. However, poorly designed schemes with weak baselines can fund business-as-usual or worse. The difference is rigorous methodology, transparent verification, and long-term commitment to environmental objectives.
This depends on the scheme. Most government schemes require continuation of agreed conservation for a set period, typically 5–20 years. Some require "aftercare" where the landowner maintains the habitat (at reduced or no payment) for additional years. Carbon schemes may require minimum retention periods to ensure the carbon cannot be re-released. The risk of reversibility—restoration being undone when payments stop—is a real weakness of many PES schemes, particularly those funding habitat creation on temporary tenure.
biodiversity net gain regulations