Payments for Ecosystem Services (PES) 101

What are Payments for Ecosystem Services (PES)?
Payments for Ecosystem Services (PES) refers to arrangements where beneficiaries of ecosystem services—such as clean water, carbon storage, biodiversity, or cultural and landscape values—compensate those who manage and sustain forests and ecosystems.

While interpretations vary, two main types are common:

1. Classical PES – voluntary, conditional agreements where payments depend on the delivery of specific services
2. Resource-transfer PES – broader public or societal investments in ecosystem stewardship, often tied to wider social and environmental goals.

While stakeholders have defined and interpreted PES differently, what truly matters is the practicality of PES: who benefits, whether the scheme achieves its intended goals, and what works best, for whom, where, and under what conditions. It is important to note that PES is fundamentally not a one-off transaction. It requires intensive facilitation, protracted negotiation, and above all, trust building. It is relational, involving long-term engagement rather than just the financial transaction.

How does PES work? What are the core features? 

1. Defining services and verification approach: PES schemes must specify what is being paid for (watershed protection, carbon, biodiversity, etc.), sometimes bundled.
2. Conditionality: Condition for payment can be input- or output-based. The former scheme type pays for actions like planting or protection. The later scheme pays for proven results, such as carbon stored, increased water flows, etc. Input-based models dominate due to practical challenges in measuring ES outcomes. Output-based PES offer higher accountability and flexibility but are not essential for success.
3. Voluntariness: Participation is usually voluntary, but in practice often includes regulatory elements.
4. Buyers & Sellers: Requires clearly identified providers (e.g., landholders, communities, NGOs) and beneficiaries (e.g., utilities, companies, governments).
5. Payment Modes: A variety of payment mechanisms are used: taxes, auctions, public-private partnerships, direct contracts, and trust funds; public-private partnerships are currently most common and preferred.
6. Co-benefits: Many schemes aim to also improve livelihoods, human capital, and welfare.

Beyond the PES scheme itself, it should be noted that PES does not operate in isolation. It is embedded within a broader mix of policies, so it’s essential to understand not only how PES functions as a standalone instrument but also how it can leverage and amplify cumulative impacts across policy landscapes

Who are the main stakeholders and what are their roles?
PES schemes rely on a network of stakeholders working together to sustain ecosystems and deliver social benefits:

• Service Providers: Local landholders, communities and NGOs who manage land and deliver ecosystem services.3
• Service Beneficiaries/payer: Governments, companies, or society that pay for the continued provision of these services.
• Government: Provides funding, regulation, legal frameworks, and legitimacy for PES schemes. Government involvement is proven to be strongly linked to PES success.
• Intermediaries: NGOs, research institutes, and conservation groups that facilitate agreements, offer technical support, and monitor compliance.
• Donors & Communities: Support funding, capacity-building, and local engagement to ensure equity and effectiveness.

What is the source of funding for PES?
PES is a transaction-based scheme and does not itself guarantee buyers or sources of funding. Although most PES initiatives are established only when there is a potential buyer and funding source, stakeholders must ensure consistent payments from buyers to keep the PES scheme sustainable. Typical sources of funding for PES include:

• Public funding remains the main source of PES finance, with some estimation indicating that about 90% of global schemes are supported by government budgets, development agencies, or state subsidies.
• Private actors—including water utilities, businesses, hotels, and tourism operators—participate as buyers, particularly in user-financed models. International donors, NGOs, and philanthropic foundations often provide funding for initial or pilot projects.

Additional financing may come from taxes, user fees, commercial licenses, carbon markets, or other compliance mechanisms.

What is the global status of PES?
PES schemes emerged in the 1970s. As of 2018, over 550 PES schemes worldwide with annual payments totaling ~$42B. Main focus were payment to watershed services, biodiversity conservation, forest carbon. By 2024, over 710 PES schemes focused on forest carbon were recorded. New PES schemes have started targeting tourism, landscape beauty, and mangrove ecosystem services.

• PES is likely to expand further through integration with broader policy frameworks (e.g., climate, biodiversity, sustainable finance).
• Adaptive governance and flexible models will be key to scaling and sustaining impact.

What has been the impact of PES in practice?

• Existing impact studies have demonstrated varying levels of impact, from small to significant, with very few showing negative outcomes.
• PES has proven effective at the local level, such as in reducing deforestation rates and sedimentation at the sub-watershed scale

How to design and implement a PES scheme?
Setting up a PES agreement requires substantial facilitation and negotiation efforts, emphasizing ecosystem service outcomes, fostering reciprocity, trust, and co-benefits for smallholders. Different approaches have varying levels of effectiveness and roles of jurisdictional land use planning, but they generally follow these steps:

Design:

• Funding horizon recurrency of payment
• Defining funding sources
• ES provision cost: differentiated or unified payments
• ES modeling: definition or ES providing activities that will condition the payments
• Method to target ES providers

Implementation:

• Setting up of PES institutional arrangements
• Payment collection process
• Payment disbursements
• Monitoring and verification
• Reporting
• Enforcement

What are the key challenges and lessons learned?
Key challenges:

• Difficulties in monitoring and verifying results
• Sustaining schemes beyond initial funding
• Securing long-term political and institutional support
• Ensuring community benefits, equity, and inclusivity
• Adapting to changing conditions and lessons learned

Key lessons:

• Mix cash and in-kind incentives to meet diverse needs
• Involve local communities meaningfully, with gender-responsive approaches
• Align PES with broader finance and policy frameworks
• Embed PES within landscape-level strategies
• Invest in strong facilitation, trust, and local capacity
• Strengthen monitoring systems to demonstrate impact

The above content is summarized by the UN Forum on Forests Secretariat from the presentations delivered during the Clearing House Webinar on Forest Financing #1 by Ms. Pham Thu Thuy, Professor at Flinders University and Ms. Beria Leimona, Theme Leader, Climate Change, Energy & Low-Carbon Development at CIFOR-ICRAF. It reflects the views and opinions of the presenters.