Biodiversity-positive subsidies – such as grants, concessional loans, and tax incentives – and payments for ecosystem services can help drive biodiversity conservation, sustainable use and restoration. This chapter explores how these mechanisms can be scaled up to more effectively address biodiversity loss, with a particular focus on direct payment schemes. It identifies opportunities for governments to expand the number and size of direct payment schemes by increasing public funding – for example by redirecting harmful subsidies – mobilising private finance and increasing participation of land managers. The chapter also outlines good practices for enhancing the environmental effectiveness and cost efficiency of payments, such as through better targeting, enforcing conditionality and increasing the use of results-based or hybrid payments.
Scaling Up Biodiversity‑Positive Incentives
Abstract
Biodiversity-positive subsidies (e.g. grants; concessional loans; tax incentives) reward actions that benefit biodiversity. They can incentivise, for example, land protection, more sustainable farming, fishing and forestry practices, and private R&D for biodiversity-friendly technologies.
Payments for ecosystem services (PES) are voluntary agreements where users of ecosystem services pay service providers for maintaining or enhancing those services. PES can be user‑financed or financed by a third-party on their behalf (e.g. through government subsidies).
Governments have a strong case for allocating more public funds to biodiversity-positive subsidies and PES. Biodiversity has public good characteristics and is critical for economic productivity and resilience, and broader societal well-being.
Governments can significantly expand biodiversity spending without increasing fiscal pressure, while at the same time reducing biodiversity financing needs. This can be achieved by:
Redirecting market distorting and environmentally harmful subsidies towards activities that benefit biodiversity. For example, less than 0.6% (USD 1.7 billion) of annual budgetary support to farmers across 54 countries targets environmental public goods, while 25% (USD 75 billion) is spent on measures that typically distort markets and which could put the environment at risk.
Scaling up environmental taxes, fees and auctioned tradable permits and allocating the generated revenue to direct payment schemes for biodiversity. Carbon pricing revenues exceeded USD 90 billion in 2023, while biodiversity-related tax revenues exceeded USD 10 billion. Both have significant scope for scaling up. However, earmarking should be designed and applied prudently to avoid inefficiencies.
Potential also exists to increase private financing for PES, particularly from businesses directly and heavily dependent on ecosystem services. Key enablers for scaling private finance include:
Clear policy, guidance and oversight to build trust and transparency for PES.
Broader environmental and corporate policies (e.g. water quality standards and nature-related disclosure requirements) that encourage corporate engagement with PES.
Strategic use of public finance e.g. funding initial programme costs and using conservation trust funds to pool resources and mediate among stakeholders.
To encourage broader participation, payment schemes should involve stakeholders early, provide adequate implementation support and avoid unnecessary administrative complexity. Bundling and stacking ecosystem services could increase incentives to participate and enhance environmental outcomes, when done effectively.
Direct payment schemes could become more environmentally effective and cost effective by:
Defining clear objectives and adopting outcome metrics.
Spatially targeting payments according to ecosystem service provision and threats.
Differentiating payment levels where compliance costs vary considerably.
Considering whole-of-property enrolment and collective payments.
Expanding the use of results-based and hybrid payment models.
Enforcing conditionality of payments.
This chapter examines the role of biodiversity-positive subsidies and payments for ecosystem services (PES) in reversing biodiversity loss. It begins by discussing the economic rationale for subsidies and PES and their current application. For analytical clarity and conciseness, the chapter then narrows its scope to opportunities for scaling up direct payment schemes1 that target biodiversity and ecosystem services. This scope includes PES and a subset of biodiversity-positive subsidies. The chapter concludes by exploring good practices for designing and implementing direct payments that are both cost- and environmentally effective.
A subsidy is “a result of a government action that confers an advantage on consumers or producers, in order to supplement their income or lower their costs” (OECD, 2005, p. 16[1]). Subsidies take different forms, including direct payments (e.g. a grant or loan), guarantees, favourable tax treatment (e.g. value added tax exemptions, reduced tax rates or tax credits) and market price support. Recipients of subsidies may be private (e.g. households, landholders and private companies) or public actors (e.g. local governments and state-owned companies). Subsidies can harm, benefit or have a negligible impact on biodiversity. They may also have mixed impacts, for example, a subsidy promoting production intensification can have negative local impacts but positive global impacts through land saving (Lankoski, Nales and Valin, 2025[2]). This report focuses on subsidies that are “biodiversity-positive”, that is, subsidies that reduce (increase) an activity or the use of something that has a proven, specific negative (positive) impact on biodiversity (definition adapted from (OECD, n.d.[3])).
The rationale for providing biodiversity-positive subsidies is that the actions of private actors, such as landholders and businesses, can produce biodiversity and ecosystem service benefits that extend to others, creating positive externalities. However, these benefits are often not captured in market prices and therefore remain unrewarded. A subsidy can address this by internalising the externality, thereby encouraging private actors to adopt these beneficial behaviours and invest in biodiversity. According to Pigouvian principles, the optimal subsidy rate should equal the marginal benefit enjoyed by others (Dasgupta, 2021[4]).
Payments for ecosystem services (PES) refer to voluntary transactions between ecosystem service users and service providers that are conditional on agreed rules of natural resource management for generating offsite services2 (Wunder, 2015[5]). Ecosystem service providers, such as landowners or managers, manage the natural resources they control according to rules agreed with ecosystem service users to ensure or enhance the provision of certain ecosystem services delivered off-site.3 They receive payments from ecosystem service beneficiaries or users for restricting activities (e.g. reducing logging or pesticide use) or for asset-building (e.g. tree planting) (Wunder, 2005[6]). PES are therefore based on the beneficiary pays approach.4 They depend on an ecosystem service users’ voluntary willingness to pay and a corresponding willingness of providers to accept payments to change natural resource management practices.
Ecosystem services users may be individuals (households), communities or public and private companies (e.g. hydroelectric, food and beverage companies) that benefit from ecosystem services. In user-financed PES, the ecosystem services are paid for directly by the user or beneficiary of the ecosystem service. Such schemes resemble Coasean bargaining and align with early definitions of PES (OECD, 2010[7]; Wunder, 2005[6]). However, in practice the buyer of ecosystem services is often the government (or another third party) acting on behalf of the user (Wunder, 2015[5]). Government-financed schemes may be necessary when beneficiaries are numerous and diffuse, making payment co-ordination costly, and when benefits are non-excludable (e.g. regional river basin protection), creating a risk of free-riding (Engel, Pagiola and Wunder, 2008[8]; OECD, 2010[7]). Government financing for PES is a form of biodiversity-positive subsidy.
Biodiversity-positive subsidies are applied in diverse sectors, including agriculture, forestry and fishing; water supply, sewerage, waste management and remediation activities; manufacturing; public administration and defence; education; and recreation. However, they are most common in the agriculture, forestry and fishing sectors (OECD, 2024[9]). Grants (one-off) account for most biodiversity-positive subsidies registered in the OECD Policy Instruments for the Environment (PINE) database (n=192), followed by tax reductions (n=68) and tax credits (n=12)5 (OECD, 2024[9]). Examples6 of biodiversity-positive subsidies include:
Grants, soft loans or tax reductions for companies and institutions investing in research and innovation that benefits biodiversity (e.g. technologies to improve biodiversity data and monitoring and to mitigate harmful impacts). For example:
Europe: Horizon Europe – the EU’s funding programme for research and innovation – which had a 2024 budget of EUR 111 million for biodiversity (EC, 2024[10]).
Denmark: The Danish Environmental Protection Agency's Pesticide and Biocide Research Programme which aims to help minimise the use of pesticides and reduce side effects on human health and the environment.
Compensating for regulatory restrictions on economic activities that harm biodiversity. For example:
Slovak Republic: Compensatory payments for regulatory restrictions on forestry activities (OECD, 2024[11]).
UK: Compensatory payments for regulatory restrictions on fisheries such as the scheme launched in 2024 to support pollack fishers, following the bycatch-only advice (UK Government, 2024[12]).
Grants, soft loans and in-kind support for households, landholders, municipalities, non-governmental organisations and private companies to implement actions that benefit biodiversity. For example:
Canada: Grants to support planting of 2 billion trees in ten years (Section 8.3).
New Zealand: Grants for community projects (municipalities and landowners) that aim to control invasive alien species.
Switzerland: Forest investment credit for small and medium enterprises to sustainably manage forests.
Tax reductions for investments and expenditures related to biodiversity projects. For example:
Colombia: Deduction from income tax of expenditures and investments on environmental quality improvements.
Spain: Tax deduction for investments and expenditures related to projects pursuing sustainable development, the conservation and improvement of the environment.
Zambia: Tax break for companies issuing a green bond7 (BIOFIN, 2022[13]).
Tax reductions, exemptions, or credits for voluntary removal of land from production and for certain land types. For example:
Colombia: Property tax exemption for biodiversity conservation on private land.
Oregon, US: Tax credit for voluntary removal of riparian land from farm production.
Spain: Property tax exemption for certain woodlands (with slow-growing species).
South Africa: Income tax deductions for declaring nature reserves or national parks on private land (Box 3.1).
Tax reduction or tax credits for gifting or selling land for conservation. For example:
Canada: Federal Ecological Gifts Programme (Box 3.1).
Finland: Tax exemption for selling land to state for nature reserves.
Virginia, US: Land preservation tax credit for donated land (or conservation easements).
South Africa’s fiscal innovations for biodiversity
A fiscal policy innovation in South Africa unlocks financial incentives for landholders to establish Nature Reserves or National Parks. Under Section 37D of South Africa’s Income Tax Act landowners can deduct the full value of their land from their taxable income if they declare it as a Nature Reserve or National Park for at least 99 years. The land typically should fall within the footprint of the National or Provincial Protected Area Expansion Strategy to qualify. The scheme was created through a collaboration of Birdlife South Africa, the South African National Biodiversity Institute (SANBI), the South Africa Department of Environment and the National Treasury. It benefited from financial support of the GEF. The tax incentive scheme is now run through the Innovative Finance unit at Wilderness Foundation Africa (WFA). When it became active in 2015, Section 37D was piloted across sites in South Africa, with the first deduction to taxpayer’s tax return in 2016. Targeted capacity building and awareness raising from 2017-18 enabled its upscaling. Dedicated environmental tax services support the ongoing implementation and enrolment in the scheme. The tax incentive has helped add approximately 500 000 hectares to South Africa’s protected area network. Total tax deductions secured in taxpayers’ returns for 2020-21 tax years were approximately R 189 million (~USD 10.6 million). It is estimated that 37D could contribute over R 1.4 billion (~USD 79 million) reducing South Africa’s biodiversity finance gap by approximately 8.8%. The return of investment is estimated to be 415%.
In 2023, following the success of Section 37D, the Department of Forestry, Fisheries and the Environment, together with the Sustainable Finance Coalition and through implementation by WFA, established the South Africa’s first tax incentive specifically aimed at the conservation of threatened species. Through Section 37C(1) of the Income Tax Act, landholders conserving threatened species (e.g. rhino and lion) can enter into Biodiversity Management Agreements (BMAs) with the Ministry of Environment and deduct all expenses related to their conservation efforts for these species from taxable income. By becoming Other Effective Area-Based Conservation Measures (OECM), areas under BMAs could contribute to South Africa’s commitment to have 30% of land, sea and inland waters under protected areas or other area-based conservation measures by 2030 under the Kunming-Montreal Global Biodiversity Framework.
The five key building blocks for these two tax incentive schemes were: 1) an effective legislative framework; 2) national policy engagement across sectors; 3) a community of practice; 4) grassroots project engagement; and 5) specialist skill sets.
Canada’s Ecological Gifts Program
Canada's Ecological Gifts Program allows individual or corporate landowners to protect ecologically sensitive land and leave a legacy for future generations. Enabled by the Income Tax Act of Canada and the Quebec Taxation Act, it offers significant tax benefits to those who donate land, or an eligible interest or right to land, to a qualified recipient. Recipients, including federal departments, provincial and municipal governments, and environmental NGOs, ensure that the land’s biodiversity and environmental heritage are conserved in perpetuity. The program is administered by Environment and Climate Change Canada. Since its inception in 1995, more than 2000 ecological gifts valued at over CAD 1.3 billion (~USD 944.3 million) have protected more than 252 000 hectares of wildlife habitat, including areas of national or provincial significance and habitats for species at risk.
While most donors participate out of a commitment to conservation, the program offers significant tax benefits for ecological gifts, including a deduction for corporate donors, a non-refundable tax credit for individuals, a reduction to zero of the capital gains tax, and a 10-year carry-forward period for claiming the donation. To qualify, donations must be certified as ecologically sensitive by the federal Minister of the Environment or, in Québec, by the provincial Minister of the Environment. The federal Minister of the Environment also determines the fair market value of the ecological gift.
Donations can be outright or tailored to meet donors' needs through conservation easements, covenants, or servitudes, allowing donors to retain ownership while imposing restrictions to protect the land's conservation value.
Source: (Government of Canada, 2024[14]), Ecological Gifts Programmes: Overview; (Stevens and van Wyk, 2020[15]), Section 37D National Report 2015-2020, Wilderness Foundation Africa, 10.13140/RG.2.2.26328.93445; (Stevens, 2024[16]), Sustainable Finance Coalition: Finance solutions for enduring naturescapes. A presentation at the OECD Workshop on Scaling Up Biodiversity Positive Incentives; (Sustainable Finance Coalition, 2023[17]), Media Release: A Tax Incentive for Threatened Species and OECMs in South Africa, https://sustainablefinancecoalition.org/coalition-media-statement/; (WFA, 2022[18]), Section 37D Fact Sheet, Biodiversity Tax Incentives, 37D Fact Sheet (wildernessfoundation.co.za).
PES have been used in developed and developing countries to provide financial incentives for conserving, sustainably using and restoring biodiversity to generate ecosystem services. PES schemes are active in at least 28 countries (OECD, 2024[19]), primarily non-OECD countries (OECD, 2024[19]; Wunder et al., 2018[20]). The Americas host the most PES schemes, followed by Asia-Pacific. Most schemes were introduced from 2000-10. Some schemes have been operating for more than two decades, such as Costa Rica’s Payments for Environmental Services Programme (pagos por servicios ambientales) (Box 3.2).
Almost all PES schemes target terrestrial and freshwater ecosystems, particularly forest ecosystems, with only a handful targeting marine ecosystems (see e.g. (Bladon et al., 2014[21])). PES have been applied in rural (Leimona et al., 2015[22]) and, to a much lesser extent, urban settings (Richards and Thompson, 2019[23]). A global analysis found that 44% focus on watershed ecosystem services, 27% on improving the state of biodiversity (e.g. habitat provision), 17% on multiple agroecosystem services and 11% on climate mitigation (Wunder et al., 2018[20]).
The scale of PES schemes varies widely. Some PES schemes cover tens to hundreds of hectares (e.g. Oach Kalan - Kuhan micro watershed PES scheme in India; Celica PES scheme in Ecuador), while other schemes extend across millions of hectares (e.g. the US Conservation Reserve Programme and the Sloping Land Conversion Programme in China) (Ezzine-de-Blas et al., 2016[24]). More than half of PES schemes are publicly funded, including 70% of the top ten largest schemes (Ezzine-de-Blas et al., 2016[24]).
Costa Rica’s “Payments for Environmental Services Programme” (pagos por servicios ambientales – PPSA) launched under the Forestry Law 7575 in 1996, recognises four environmental services: greenhouse gas (GHG) mitigation, protection of water resources, biodiversity conservation, and scenic beauty. Administered by FONAFIFO, PPSA pays participants that commit to forest protection, commercial reforestation, agroforestry, sustainable forest management or regeneration of degraded areas. Eligible participants include individuals, family businesses, small and medium enterprises, development or conservation co-operatives, and indigenous communities with property rights. Five-year contracts between the central government and programme participants specify land use commitments. Participants can also benefit from property tax exemptions and measures to secure land tenure.
The PPSA has been a key driver of forest coverage growth, together with the complementary deforestation ban and extension of protected areas. It has contributed to restoring degraded forestlands and, to a lesser extent, preventing forest clearing by providing alternative land uses. For the period 1997-2023, 21 022 contracts were signed under the PPSA covering 1.46 million hectares. A total of CRC 339 923 250 000 (USD 675 000 000) was disbursed. In addition to biodiversity benefits, the scheme creates about 3 500-4 000 direct jobs annually.
Despite positively contributing to Costa Rica’s biodiversity and climate goals, the scheme has faced challenges. Over 90% of its budget is from fossil fuel tax revenues, with 3.5% of the revenues earmarked for PPSA. Additional funding comes from the Water Utilisation Levy (6%) and the private sector (e.g. hydroelectric companies). However, Costa Rica’s push for net-zero emissions by 2050 threatens this model, as fuel tax revenues decline due to decarbonisation. Since 2015, shrinking fiscal transfers have reduced new land registrations, with further cuts in 2020 due to pandemic-related drops in fuel use. FONAFIFO is, therefore, exploring new funding options. Additionally, opportunities exist to increase participation from women (15%) and Indigenous associations (2%), who remain under-represented compared to companies (46%) and men (37%).
Key strengths of the scheme include its strong legal foundation and adaptability. PPSA’s administrative flexibility and FONAFIFO’s autonomy have allowed the programme to refine selection criteria and contract terms in response to economic shifts, political priorities and lessons learned. In 2024, the scheme moved from bundled payments to ecosystem service stacking, differentiating payments based on services provided. Participants receive a base payment of CRC 21 000/ha/year (USD 40/ha/year) for GHG mitigation and biodiversity services and can receive an additional payment of CRC 16 000/ha/year (USD 30/ha/year) for either water resource protection or additional biodiversity benefits, and a total of CRC 53 000/ha/year (USD 100/ha/year) if both additional benefits are provided. FONAFIFO and the REDD+ fund pay the base. Additional payments for water protection and biodiversity are funded by the Water Utilisation Levy and Sustainable Biodiversity Fund, respectively. Drawing on the success of the scheme, Costa Rica is exploring the use of PES in other ecosystems. For example, in 2024 the Ministry of Environment and Energy launched a marine PES pilot project in the Gulf of Nicoya.
Source: (Havinga et al., 2020[25]), Spatial quantification to examine the effectiveness of payments for ecosystem services: A case study of Costa Rica’s Pago de Servicios Ambientales, https://doi.org/10.1016/j.ecolind.2019.105766; (ILO, UNEP and IUCN, 2022[26]), Decent Work in Nature-based Solutions 2022, https://www.unep.org/resources/report/decent-work-nature-based-solutions (MINAE, 2025[27]), Payment for Environmental Services Program: Amounts to be recognised for the different PES activities in 2024; (OECD, 2023[28]), OECD Environmental Performance Reviews: Costa Rica 2023, https://doi.org/10.1787/ec94fd4e-en; (Porras and Chacón-Cascante, 2018[29]), Costa Rica's Payments for Ecosystem Services Programme, https://www.iied.org/g04272.
In addition to the biodiversity-specific subsidies and PES referred to above, other subsidies can also benefit biodiversity. For example, subsidies that promote sustainable productivity growth in agriculture can – in the right policy settings8 – reduce demand for land, supporting global biodiversity while also delivering economic benefits (Bateman and Balmford, 2023[30]; OECD, 2024[31]; World Bank Group, 2021[32]) (Box 3.3). However, support for agricultural knowledge and innovation systems, a key driver of productivity growth, has declined relative to the sector’s size, from 0.9% of the combined value of production in 2000-02 to just 0.5% in 2021-23 (OECD, 2024[31]). Scaling up R&D subsidies, alongside strong environmental policies, could be a crucial tool for aligning economic and environmental objectives.
Insights from World Bank modelling
According to a report by the World Bank Group the ongoing conversion of natural land could cost 2.3 percent of global GDP annually by 2030 due to declines in ecosystem services. However, various policies could set the world on a different path by avoiding conversion of natural land. For example, domestic and global forest carbon payment schemes avoid 26 and 35 percent of business-as-usual conversion. Integrating this measure into a comprehensive policy package that includes decoupled agricultural support to farmers and investment in agricultural research and development (R&D) avoids 50 percent of natural land conversion. The comprehensive policy package increases global GDP by up to USD 150 billion with most countries, and particularly developing countries set to benefit economically. Most of these economic gains come from productivity growth stimulated by investment in R&D.
Source: (World Bank Group, 2021[32]), The Economic Case for Nature: A global Earth-economy model to assess development policy pathways, https://hdl.handle.net/10986/35882.
While the use of biodiversity-positive subsidies and PES has increased over the past decade, their full potential is yet to be realised (Dasgupta, 2021[4]; Wunder et al., 2020[33]). This section provides insights for scaling up the use and size of subsidies and PES. It first discusses the role of legal frameworks, before exploring opportunities to increase public and private finance for biodiversity-positive subsidies and PES. It then explores key considerations for increasing participation in these schemes. This section and the next (Section 3.4) focus on direct payment schemes targeting biodiversity and the ecosystem services it underpins. This scope encompasses PES and a subset of biodiversity-positive subsidies.
3.3.1. Establish a legal framework conducive to scaling up direct payment schemes for biodiversity and ecosystem services
Scaling up direct payment schemes to their full potential may require governments to adapt their legal frameworks (Greiber, 2009[34]). For example, in Brazil a key barrier to PES was the illegality of public bodies making direct payments to landowners (Pagiola, Von Glehn and Taffarello, 2013[35]). This was addressed through subnational legislation and more recently by the adoption of a law establishing a National Policy of Payment for Environmental Services, the National Registry of Payment for Environmental Services, and the Federal Payment for Environmental Services Program (Law no 14,119/2021). Three broad categories of legal frameworks exist for biodiversity-positive subsidies and PES (adapted from (Jackson, 2016[36])): 1) legal frameworks to establish centralised state-run schemes; 2) legal frameworks to enable, guide and provide public oversight of decentralised schemes; and 3) supporting legal frameworks which are not specific to PES, but can stimulate or support payments.
Costa Rica’s PPSA exemplifies the role of legal frameworks in creating state-run direct payment schemes for biodiversity and ecosystems (Box 3.2). The Forestry Law established the PPSA and the National Forest Finance Fund (FONAFIFO), while annual decrees specify budget allocations for the different PES activities. Subsequent tax law amendments supported financing of the PPSA. Other examples include the US Conservation Reserve Programme, authorised by the Food Security Act of 1985, reauthorised by the Agricultural Improvement Act of 2018 and supported by various other regulations (USDA, 2025[37]); and Ecuador’s Socio Bosque Programme, which has its roots in the country’s new Constitution (2008) and was established by a 2008 Ministerial Decree authorising the Ministry of Environment to enter contracts with landowners (Jackson, 2016[36]). A key lesson from Brazil is the importance of ensuring that laws maintain a degree of flexibility: details such as payment levels or eligible activities are better addressed by regulations, which can be more easily changed than laws (Pagiola, Von Glehn and Taffarello, 2013[35]).
The second type of legal framework is one which authorises and provides regulatory oversight for decentralised PES schemes. Such frameworks provide regulatory limits, legal certainty and support for voluntary public and private payments for biodiversity and ecosystem services (Jackson, 2016[36]). They help to ensure ecological integrity of PES schemes and consistency with national objectives. Regulating legal frameworks can play a role in scaling private finance for PES (Section 3.3.2). Peru, for example, has established a broad legal framework regulating PES across the country (Box 3.4), while Colombia adopted regulations in 2013 that provide rules and guidance for developing and financing PES for watershed protection in municipalities.
In 2014, Peru adopted Law No 30215 on payments for ecosystem services (MERESE - Mecanismos de Retribución por Servicios Ecosistémicos). MERESE is defined broadly to include a set of schemes, tools, instruments, and incentives to generate, channel, transfer and invest economic resources in the conservation, recovery, and sustainable use of ecosystems through voluntary agreements. The aim of the MERESE law is to promote, regulate and supervise public and private PES for the conservation, restoration, and sustainable use of ecosystems to permanently secure the benefits they provide. The law gives the Ministry of Environment (MINAM) national oversight of all PES, and requires MINAM to provide technical, administrative and financial support to local and regional governments to develop PES.
The law defines ecosystem services as direct and indirect economic, social and environmental benefits people obtain from the correct functioning of ecosystems, such as hydrological regulation of watersheds, maintenance of biodiversity, carbon sequestration, scenic beauty, soil formation, and genetic resources. It also determines who is eligible to receive payments as ‘contributors’ to ecosystem services: possessors or titleholders of lands; permit holders for renewable natural resources; NGOs under management agreements for protected areas; and others recognised by MINAM.
By 2023 there were 70 MERESE initiatives nationwide, 49 involving water and sanitation companies, 7 in the tourism sector, and 14 involving water users for irrigation, sanitation boards and civil associations. As required by law, MINAM established a national registry to improve the visibility and transparency of MERESE. As of 2024, 10 agreements were registered, which together cover 8 900 hectares and USD 5 million invested in conservation and ecosystem restoration.
The MERESE initiative is complemented by three other financing mechanisms supported by MINAM. These are:
i) Works-for-tax-mechanism (OxI): OxI was launched in 2008 to allow private companies to invest part of their taxes toward public investment in infrastructure projects instead of paying them directly. Policy advances expanded the scope of OxI to include investments in natural infrastructure. Ministerial Resolution No. 210-2022-MINAM approves an OxI Roadmap for Natural Infrastructure, setting out strategic actions to promote OxI in natural infrastructure investments.
ii) Conditional Direct Transfers (CDTs) from the National Programme of Forest Conservation: CDT has been operational since 2010 when it was established by Supreme Decree 008-2010-MINAM. CDT establishes voluntary agreements with native communities, paying 12 soles (USD 3.2) per hectare of conserved forest for a period of five years. It is executed through an incentive management plan. By 2024, 3.6 million hectares of forest had been conserved benefiting 330 native and peasant communities.
iii) Remuneration for the Agrobiodiversity Conservation Service (ReSCA): ReSCA is a mechanism proposed by MINAM to reward famers who conserve agrobiodiversity in their farms (in situ). A GEF Agrobiodiversity Project (2019-22) supporting this initiative engaged 957 farming families from across 60 rural communities.
Source: (MINAM, 2021[38]), Guidelines for the Design and Implementation of Payment for Ecosystem Services (PES) Mechanisms; (MINAM, 2023[39]), Promoting the Mobilisation of Investments in Natural Infrastructure through the Works-for-Taxes Mechanism. https://cdn.www.gob.pe/uploads/document/file/4239569/hoja%20de%20ruta%20VF_compressed%20%281%29.pdf.pdf?v=1678478083; (Torres, 2024[40]), Financial Mechanisms for Biodiversity Conservation in Peru. Presentation at OECD Workshop on Scaling up Biodiversity-Positive Incentives., /www.slideshare.net/slideshow/workshop-on-scaling-up-biodiversity-positive-incentives-raquel-soto/272889274#4.
The third type of legal framework is non-specific to PES but can support its use. For example, PES may be established most easily in countries where the constitution, laws and sectoral policies explicitly recognise the importance of ecosystem services and prioritise their protection. A strong foundation in ecosystem service valuation and national environmental accounting frameworks can also help quantify benefits and create a stronger case for PES implementation (EC, 2023[41]). Results-based environmental regulations (quality standards) such as the EU’s Drinking Water Direct and Natural Mineral Water Directive and the US’ Clean Water Act and Safe Drinking Water can incentivise governments, companies and landholders to adopt PES to meet legal requirements cost-effectively. For example, one of the earliest corporate-finance PES programmes – the Vittel PES scheme in France – was established in the 1990s to avoid losing the Vittel natural mineral water label which required water to contain no more than 4.5 mg of nitrates per litre and no pesticides (Perrot-Maître, 2006[42]). Legal requirements for nature-related disclosures could in theory help bolster private sector interest in PES by increasing assessment and transparency of companies’ dependencies and impacts on nature (Section 3.3.2).
3.3.2. Secure sufficient, reliable funding and use it efficiently
Funding is a common constraint to expanding the scale, reach, and effectiveness of biodiversity-positive subsidies and PES. Direct payment schemes require adequate financial resources to compensate service providers for the costs of participating (hereafter “compliance costs”). These costs include foregone income (i.e. opportunity costs), additional expenses incurred from adopting practices (e.g. ecosystem restoration activities), and private transaction costs (e.g. contract negotiation). Sufficient funding is also required to cover the administrative costs of schemes, including those associated with environmental studies, scheme design, monitoring, and enforcement (Jack, Kousky and Sims, 2008[43]; LEI International Policy/Alterra, 2018[44]; Mettepenningen et al., 2013[45]). Opportunities exist to increase funding for biodiversity-positive subsidies and PES, leveraging finance from both the public and private sector. Given that financial resources are limited, designing cost-effective schemes is also critical for scaling subsidies and PES (Section 3.4).
Public finance
Public finance is the backbone of biodiversity finance (OECD, 2020[46]). Owing to biodiversity’s public good characteristics and its importance for economic productivity, resilience and well-being, the case for increasing public expenditure is strong (Kedward et al., 2022[47]; OECD, 2021[48]). While private finance can and must play a greater role, well-targeted public investment remains essential for achieving biodiversity goals (Kedward et al., 2022[47]; Flammer, Giroux and Heal, 2023[49]).
In a context of scarce resources and competing policy priorities, scaling up public finance requires biodiversity to be sufficiently visible and valued on the political agenda. The latest Global Risks Report highlights biodiversity loss and ecosystem collapse as among the most severe risks of the decade (WEF, 2025[50]), while high level reports (Dasgupta, 2021[4]; OECD, 2021[48]; WEF, 2020[51]) underscore biodiversity’s fundamental links to the economy. However, national decision makers may require a clearer case for action when facing multiple policy challenges (Perier, 2024[52]). Opportunities for scaling are greatest when biodiversity is aligned with broader political priorities, such as economic competitiveness (Perier, 2024[52]) (Section 8.2).
Setting biodiversity finance targets and strengthening tracking of biodiversity finance can increase public investment and accountability. For example, the EU set biodiversity spending targets for its multiannual financial framework (MFF) 2021-27: 7.5% of the budget in 2024 and 10% in 2026-27 (Perier, 2024[52]). However, without integration into sectoral regulations, such targets risk being unmet – as seen in the draft MFF 2021-27 (Perier, 2024[52]).To be effective, biodiversity finance targets must be mainstreamed across policies and sectors.
Increased public funding for biodiversity-positive subsidies does not necessarily require an additional strain on public budgets. By redirecting inefficient and environmentally harmful subsidies towards biodiversity-positive activities, governments can bolster biodiversity support without requiring additional funding. Annually, governments provide various production and consumption activities with support worth hundreds of billions of dollars. This support takes different forms such as market price support (e.g. import tariffs) and budgetary support. However, much of this support distorts markets and is environmentally harmful, with only a small fraction benefiting biodiversity (OECD, Forthcoming[53]; OECD, 2024[31]; OECD, 2021[48]).
For instance, from 2021-23, less than 0.6% (USD 1.7 billion) of the USD 295 billion in annual budgetary support to agricultural producers across 54 countries was directed toward environmental public goods like biodiversity (OECD, 2024[31]). Meanwhile, 25% (USD 75 billion) supported output payments and unconstrained use of variable inputs such as fertilisers and fuel, which are among the most market distorting measures (OECD, 2024[31]), and can put the environment at risk (Lankoski, Nales and Valin, 2025[2]). Repurposing harmful subsidies in agriculture, fisheries (Box 3.5), and other sectors presents a major opportunity to both reduce biodiversity loss and increase funding for biodiversity-positive initiatives. While some non-budgetary measures cannot be redirected to biodiversity finance, reforming them remains essential for reducing biodiversity harm and improving economic efficiency.
Total support to fisheries over 2020-22 equalled a gross annual average of USD 10.7 billion. Fisheries support policies can risk encouraging unsustainable fishing if they reduce the costs of fishing, thereby increasing the profits and incentivising increased effort or capacity. However, these risks can be mitigated by the context in which the support is given – if fisheries management effectively control effort or capacity, if the support is targeted to underfished stocks, or if the support policies have strict eligibility requirements. In OECD countries, 49% of the support provided over the period 2020-22 was targeted at ensuring productive and sustainable fisheries through spending on management, monitoring, control and surveillance (MMCS), which poses no risk of encouraging unsustainable fishing. Encouragingly, spending on MMCS is now the largest type of support in OECD countries. However, at the same time, 9% of fisheries support in the OECD was granted through policies that present a high risk of encouraging unsustainable fishing in the absence of effective fisheries management, mostly as support to fuel and vessels. Another 34% of support was granted through policies that can present a moderate, yet non-negligible, risk of encouraging unsustainable fishing, notably through support to infrastructure and support to income (which both accounted for 16% of total support). Moreover, in the emerging economies included in the analysis, 32% of support came from policies that present a high risk of encouraging unsustainable fishing in the absence of effective fisheries management (primarily support to fuel).
Note: The total support to fisheries estimate is based on the 41 countries and economies that reported their support to fisheries to OECD’s Fisheries Support Estimate (FSE) database. These countries account for the majority of global fish production.
Source: (OECD, 2025[54]), OECD Review of Fisheries 2025, 10.1787/560cd8fc-en.
Reorienting rather than eliminating subsidies that harm biodiversity can help address trade-offs associated with reforms – such as those associated with food security and livelihoods – and ease political challenges (OECD, 2017[55]). Advantages of such approaches have been analysed in detail in the case of climate action (Valin, Henderson and Lankoski, 2023[56]). Similarly, maintaining overall sector support while adjusting its purpose and eligibility and increasing transfers beneficial to biodiversity can unlock political barriers compared to reforms targeting outright subsidy removal. In Switzerland, for instance, environmentally harmful agricultural payments were restructured from 2014-17 to better support biodiversity while increasing total budgetary aid. Although a farmer’s union opposed the change, other agricultural groups such as organic and alpine farmers backed it, which enabled the reform to be passed (OECD, 2017[57]). Similarly, the EU Common Agricultural Policy has been through various stages of policy reforms over the past decades to reform the modalities and objectives of its payments to farmers and reduce their impact on the environment without reducing the level of support (e.g. payment decoupling in 2003, greening of payments in 2013, introduction of eco-schemes in 2021).
To redirect harmful subsidies, governments must first identify and assess them. While some policies pose higher risks of promoting unsustainable or market-distorting activities, their actual impact varies by context (OECD, 2025[54]). National-level assessments help prioritise subsidies for reform, and OECD research outlines key steps for conducting such reviews (Matthews and Karousakis, 2022[58]). While each country should take responsibility for identifying, assessing and repurposing their own environmentally harmful subsidies, international development finance can support efforts in developing nations. For example, UNDP BIOFIN, with financial support from several OECD Development Assistance Committee (DAC) members, provides guidance and assistance to help countries identify and repurpose harmful subsidies (BIOFIN, 2024[59]).
Additionally, increased spending on biodiversity could be offset by scaling up environmentally-related taxes, fees and tradable permits, thereby simultaneously dissuading biodiversity-harmful activities. Instruments such as emissions trading schemes,9 carbon taxes and biodiversity-positive taxes or fees (e.g. pesticide taxes and water charges – Chapter 5), can generate significant revenue. For example, global revenues from carbon pricing instruments totalled about USD 93-95 billion in 2023, up from USD 26 billion in 2015 (Cardenas Monar, 2024[60]), and could be further increased by ratcheting up the price per tonne of CO2 and increasing the coverage of carbon pricing mechanisms. As of 2021, 58% of the 40 billion tonnes of greenhouse gas emissions of 72 countries10 remained unpriced (OECD, 2023[61]). Revenues from biodiversity-positive taxes or fees currently stand at approximately USD 10 billion per year across OECD countries and have potential for scaling up (OECD, 2024[19]).
Governments can earmark revenues generated from environmental taxes, fees and auctioned tradable permits for biodiversity and other environmental purposes. While the appropriateness of earmarking remains disputed (Section 2.2), it has been fundamental for several direct payment schemes such as the Costa Rican PPS. Various local and national governments already earmark revenues for specific policy objectives. For example, an analysis of 30 carbon pricing instruments across 27 jurisdictions found that 21 jurisdictions have stated social, economic or environmental policy objectives for all, or part of carbon revenues generated (Cardenas Monar, 2024[60]). Of these, 15 have strong earmarking (i.e. legal requirement), 1 soft earmarking (policy commitments without legal force) and 5 have hybrid soft or strong earmarking (i.e. earmarking for some revenues from carbon pricing instruments) (Cardenas Monar, 2024[60]). Carbon revenues are earmarked for climate and/or nature related purposes in 9 out of 14 analysed emission trading schemes and 8 out of 16 carbon tax systems. More than half of annual carbon pricing revenue has been used for climate and/or nature purposes (Cardenas Monar, 2024[60]). Most of the revenues from Colombia’s national carbon tax, for example, support payments for ecosystem services and other biodiversity schemes through the new Fund for Life and Biodiversity (Box 3.6). When adopting earmarking, it is good practice to set clear objectives, define a specific time frame, and monitor its impacts to assess whether its continuation is justified (Chapter 2).
The Colombian government earmarks revenues from its carbon tax for projects with environmental, social and economic objectives. Until 2022, 50% of proceeds from the carbon tax were channelled through the Colombia in Peace Fund for the substitution of illicit crops and 50% through the National Environmental Fund (FONAM) to support projects that could help achieve climate and other environmental goals. The types of actions FONAM supported included managing coastal erosion, reducing deforestation, conserving water sources, and protecting, restoring and sustainably using ecosystems.
A 2022 law changes the distribution of carbon tax revenues. Since 2023, 80% of the revenues from Colombia’s national carbon tax are earmarked for environmental purposes and 20% for the substitution of illicit crops. All the revenues earmarked for environmental purposes go to a new Fund for Life and Biodiversity, established by Law 2294. The fund will also be capitalised from government budgets, development finance, donations and other sources. It is expected to invest more than USD 5 billion in environmental projects by 2026, and to bring an additional 75 000 hectares under PES. The fund will be administered by a trust company, who will be responsible for the necessary resources to each of the projects prioritised by the Boards of Directors.
Source: (Cardenas Monar, 2024[60]), Maximising benefits of carbon pricing through carbon revenue use: A review of international experiences, Maximising-benefits-of-carbon-pricing_27june.pdf (i4ce.org); (Minambiente, 2023[62]), Fund for Life, Fund for Life - (minambiente.gov.co).
Increase private finance for payments for ecosystem services
Given the significant finance gap for biodiversity and strains on public budgets, meeting global biodiversity targets requires mobilising finance from all sources, as stipulated in the Kunming-Montreal Global Biodiversity Framework. To date, most PES schemes have been publicly funded, often through earmarked fees on private actors who benefit or taxes on those who pollute (see above). However, some schemes have leveraged private finance from for-profit corporates, not-for-profit organisations, philanthropic foundations and individuals. This section focuses specifically on corporate (for-profit) finance.
The potential for scaling corporate-financed PES is likely to be highest where a company’s operations depend on ecosystem service inputs over which other private land users have control (Thompson, 2021[63]), and which are at risk (Bösch, Elsasser and Wunder, 2019[64]). For example, many of the privately financed PES schemes have focused on changing upstream land-use practices to improve water quality and quantity downstream, with payments made by beverage companies, breweries, hydropower companies and water utilities (Ezzine-de-Blas et al., 2016[24]). Corporates have an increasing awareness of – and ability to measure – their impacts and dependence on biodiversity and ecosystem services facilitated by initiatives such as the Taskforce for Nature Related Financial Disclosure (TNFD) (TNFD, 2024[65]), the Science Based Targets Network (SBTN, 2025[66]), and the development of biodiversity measurement tools (F4B Foundation; EC; EBBP, 2024[67]). PES is one approach companies could take to reduce nature-related risks across their supply chain (i.e. through “insetting” – see also Chapter 6 on biodiversity credits), maintaining or increasing the quality and quantity of ecosystem services inputs upon which they depend.
Another focus of corporate-financed PES with growth potential is payments for carbon sequestration and storage (Thompson, 2021[63]). Several PES schemes that leverage private finance have included a focus on carbon (Ezzine-de-Blas et al., 2016[24]). Chapter 8 explores the opportunities, risks and key considerations for payment schemes seeking to harness climate mitigation and adaptation benefits through investments in nature-based solutions.
Governments can play a key role in mobilising private finance for PES. First, tailoring legal frameworks can help enable and promote private actors’ engagement in PES (Section 3.3.1). Laws and policies that support private sector engagement can be specific or non-specific to PES. PES-specific policy includes standards and guidance to improve the transparency and environmental integrity of PES, thereby increasing trust and confidence on both the supply and demand sides of PES. Non-specific policies that could support PES include environmental quality standards and regulated disclosures of nature-related impacts, dependencies, and associated risks.
Second, government bodies (e.g. municipal governments, national government agencies or ministries and public development agencies) – or other organisations – can facilitate payments for ecosystem services by adopting an intermediary role between ecosystem service buyers and sellers. Trusted intermediaries have been a common factor in many PES schemes and can be particularly important where there are multiple sellers and buyers (Wunder et al., 2020[33]). An intermediary’s role can include information exchange, administration and project implementation, networking, representation and mediation, and programme design (Huber-Stearns, Goldstein and Duke, 2013[68]).
Third, governments can use public finance to leverage private finance in PES (Wollenberg, 2022[69]), although care is needed to ensure public resources are used strategically and efficiently (Section 8.1.1) and (Mazzucato, 2025[70])). Grants, concessional loans and technical assistance can be used to support pilot projects or cover the upfront and transaction costs of projects, thereby improving the risk-return profile of ecosystem service projects and confidence in PES. For example, Australia funded a Carbon+Biodiversity Pilot, which informed the design of the Nature Repair Market (DCCEEW, 2023[71]). Public and private finance can also be combined, for example through trust funds (discussed below), to increase the size of a scheme and incentives for land managers. The establishment of trust funds or use of existing administrative structures can help reduce transaction costs for private sector actors wishing to contribute to a PES scheme (Engel, Pagiola and Wunder, 2008[8]).
While it is clear that untapped potential remains, views differ on the extent to which private finance can be scaled (Kedward et al., 2022[47]; Thompson, 2021[63]; Wunder et al., 2020[33]). Scaling private finance may be constrained by a limited willingness-to-pay and capacity to organise, as companies and other ecosystem service users may tend to free-ride and wait for government intervention (Wunder et al., 2020[33]). Willingness to pay for ecosystem services may be influenced by institutional norms and societal views and therefore differ from one context to another. For example, in countries where there is a tradition or expectation for governments to intervene to provide public goods, it may be more difficult to introduce corporate-financed PES (Wunder, 2021[72]).
Trust funds to pool funding and connect stakeholders for PES
Trust funds can be flexible and effective mechanisms for securing and blending diverse sources of public and private funding for payments for ecosystems. For example, a fund may receive funding from ecosystem services users such as communities, public utilities and private companies – either through voluntary contributions or legal requirements such as a water use fee – philanthropic foundations, local or national governments, and bilateral and multilateral development finance providers. Furthermore, trust funds can mobilise additional finance by investing the pooled resources in the financial markets to provide long-term funding for PES.
Trust funds’ status as private, independent financial entities gives them political and financial independence. This independence can reduce the influence of political and economic volatility and provide confidence for financial entities wishing to contribute financial resources (De Monbrison and Landreau, 2022[73]; Kauffman, 2014[74]). Funds can also be an effective mechanism for facilitating negotiation and collaboration among public and private stakeholders, and between ecosystem service providers and beneficiaries (Kauffman, 2014[74]).
Several countries have established trust funds with PES-like elements. Trust funds have been designed to support biodiversity in marine (e.g. The BACOMAB Trust Fund which finances conservation in Banc d’Arguin National Park and other Mauritanian coastal and marine protected areas (BACoMaB Trust Fund, 2019[75])), terrestrial (e.g. the Vietnamese National Forest Protection and Development Fund (Liagre et al., 2021[76])) and freshwater ecosystems (Box 3.7). They have proven adaptable to different local socio-cultural and political conditions (Kauffman, 2014[74]). For example, globally, there are at least 40 water funds operating in 13 countries (Calvache, Benitez and Ramos, 2012[77]).
FONAG
In Ecuador, the Quito Water Fund (FONAG), which was set up by Quito’s municipal water company and The Nature Conservancy Agency in 2000, generates USD 2 million annually for activities that protect Quito’s watershed, it’s biodiversity and ecosystem services. The municipal drinking water and electrical utilities, a private brewery, hydropower companies and a water bottling company commit resources to the trust fund. These resources are complemented by donations from international and local NGOs and governments. A return-on-investment study completed for Quito’s municipal water company in 2018 showed that improvements in water quality translated into a 7.14% rate of return on every dollar invested.
FORAGUA
FORAGUA is a regional water fund of southern Ecuador established in 2009. The fund originally joined five municipal governments that each had small scale payments for ecosystem service schemes operating or under development. An additional nine municipalities have since joined, covering 500 000 residents. It has restored 1 500 hectares of land and is conserving an additional 337 000 hectares. The fund aims to work in 39 municipalities and to conserve 600 000 hectares of land by 2030. The idea of the fund is to pool resources from municipal governments in a common trust fund administered by an independent financial entity. Participating municipalities levy a fee on water use, the proceeds of which go to the fund. Municipalities determine the use of their own funds through annual investment plans, which are financed from trust money. Municipalities – particularly smaller municipalities – benefit from the support of FORAGUA’s Technical Secretariat and their capacity to bring in additional resources beyond water fees. For example, FORAGUA has also received funding from Ecuador’s National Water Secretariat, international foundations and provider agencies.
Source: (Joslin and Jepson, 2018[78]), Territory and authority of water fund payments for ecosystem services in Ecuador’s Andes, https://doi.org/10.1016/j.geoforum.2018.02.016; (Latin American Water Funds Partnership, n.d.[79]), Fondo para la proteccíon del Agua - FONAG, wfquito.pdf (fondosdeagua.org); (Selibas, 2021[80]), Ecuadoran water fund transforms consumers into conservationists; (Wunder and Albán, 2008[81]), Decentralised payments for environmental services: The cases of Pimampiro and PROFAFOR in Ecuador.
Bundling and stacking of ecosystem services
Ecosystem services can be sold individually, bundled or stacked (sometimes referred to as layered) (Section 8.1.2). Bundling is when various services (e.g. carbon sequestration, biodiversity protection and water regulation) are packaged and sold to a single buyer. Stacking is when different buyers pay for different ecosystem services provided by a single project, or a single buyer pays for each service individually.
Stacking payments may help increase the use and size of PES programmes by increasing economic incentives for land managers. For example, a land manager may receive payments from a private downstream beneficiary for the hydrological services they provide and public payments from government for protecting habitat for species. Bundling may also increase incentives for landowners where buyers are willing to pay a premium compared to single ecosystem service schemes.11 By increasing the overall rewards for land managers, bundling or stacking ecosystem services can help payment schemes compete with alternative, less sustainable land-use practices (WRI, 2009[82]; von Hase and Cassin, 2018[83]). Bundling and stacking present both opportunities and risks that need to be carefully considered and addressed in the design of policies and projects (Section 8.1.2).
3.3.3. Engage early with stakeholders and understand what drives participation
Participation of landowners or land managers in payment schemes for biodiversity and ecosystem services is voluntary. Scaling up and ensuring the long-term effectiveness of these schemes therefore depends on securing and maintaining participation. The amount of payment is a key determinant of participation (Klimek et al., 2008[84]; Yost et al., 2020[85]), and of a scheme’s effectiveness12 (Nuñez Godoy and Pienaar, 2023[86]). Service providers are less likely to participate in schemes if the payment does not cover their costs. The way payments are structured – for example, whether they are practice or results-based and whether they are collective or individual payments – can also affect participation (Section 3.4).
While an attractive level of payment is important, it may be insufficient to maintain or scale enrolment in subsidy and PES programmes. Analyses of programmes across the globe have identified a variety of non-monetary factors that influence participation (Le Velly, Sauquet and Cortina-Villar, 2017[87]; Sorice et al., 2018[88]). The (relative) importance of these factors is likely to vary from one location to another depending on social, political, cultural and economic contexts (Cooke et al., 2012[89]; Huber-Stearns et al., 2017[90]; Murtinho and Hayes, 2017[91]) and even within a community (Kuhfuss et al., 2024[92]; Murtinho and Hayes, 2017[91]). Designing subsidy and PES programmes that are tailored to the needs of the target participants is fundamental to ensuring adequate participation and implementation (Sorice and Donlan, 2015[93]). France’s pilot PES programme (Box 3.8), for example, is considered attractive to farmers not just for financial reasons but also for its flexibility, co-construction by local actors and perceived fairness, equitability and legitimacy. Approximately 85% of participants were not previously involved in other local initiatives (MTECT, 2024[94]).
The French government allocated a budget of EUR 170 million from 2020-24 to support PES for farmers, as part of the 2018 Biodiversity Plan. The aim is to recognise the biodiversity, climate and water benefits provided by farmers and to encourage more environmentally sustainable farming practices. The scheme, developed by the Ministry of Ecological Transition and the Water Agencies, is implemented through collective, local projects led by recognised entities (local authorities, water syndicates, private or non-profit organisations) in areas with significant environmental challenges. Farmers are paid based on annual results assessed across their entire farm. Payments reward both the sustainable management of existing landscape features (e.g. permanent grasslands, hedgerows) and efforts to transition to more sustainable production systems (e.g. lengthening crop rotations, maintaining soil cover).
Projects are selected through a call for expressions of interest launched by the Water Agencies. Once approved by the relevant Water Agency, the project and its indicators can begin accepting applications for financial support. Full funding by most Water Agencies has allowed many local authorities to take ownership of the tool, strengthening their legitimacy, both in project coordination and political leadership. Projects entail a five-year voluntary commitment by farmers. By the end of 2024, 130 projects had been implemented (primarily focusing on water quality), engaging approximately 3 500 farmers and covering 280 000 hectares.
Source: (MTE, 2025[95]), Payments for Environmental Services www.ecologie.gouv.fr/politiques-publiques/paiements-services-environnementaux-publics; (MTECT, 2024[94]), Assessment of the First Phase of the Evaluation of the Public Payments for Environmental Services (PES) Pilot Scheme, www.ecologie.gouv.fr/sites/default/files/documents/Resume%20de%20l%20evaluation%20fini-2.pdf.
Property rights can be a key factor determining participation in subsidy and PES programmes. Without secure property rights, land managers cannot effectively exclude third parties and therefore cannot ensure ecosystem service provision. According to (Wunder et al., 2020[33]), secure property rights are a key condition for PES emergence (Box 3.9) and may have been a limiting factor in PES growth in certain countries and areas. While lack of property rights has been cited by some individuals as a reason for not engaging in PES schemes, it can also be the motivation for enrolling in schemes if participants perceive that enrolment would help secure their property rights (Arriagada et al., 2015[96]; Nuñez Godoy and Pienaar, 2023[86]).
Wunder et al. 2020 identify four key factors that influence the emergence of PES.
First, the expected added ecosystem service value (or beneficiaries’ willingness-to-pay) must exceed expected costs of providing ecosystem services (or providers’ willingness-to-accept). PES is unlikely to emerge where the opportunity costs outweigh the expected environmental benefits.
Second, the payments can be organised. This means that ecosystem service beneficiaries recognise their self-interest in engaging in PES and can organise payments or have governments do so on their behalf.
Third, implementers and intermediaries are considered by ecosystem service providers as legitimate actors, which may involve lengthy negotiations and trust building.
Fourth, potential ecosystem service providers must have sufficiently clear property rights to their land and resources.
While the first precondition is considered a sine qua non for PES, PES may be possible in the absence of the other three preconditions if PES is accompanied by land tenure reform and institutional capacity building.
Source: (Wunder et al., 2020[33]), Payments for Environmental Services: Past Performance and Pending Potentials, https://doi.org/10.1146/annurev-resource-100518-094206.
Intrinsic environmental values and trust in environmental outcomes of a scheme can also influence participations. One of the cited motivations for participants to enrol in schemes in Argentina and Costa Rica was their desire to promote biodiversity (Arriagada et al., 2015[96]; Nuñez Godoy and Pienaar, 2023[86]). The corollary of this is that lack of confidence in a schemes’ environmental credentials can restrict participation (Nuñez Godoy and Pienaar, 2023[86]; Sorice et al., 2018[88]). Building confidence in the expected environmental outcomes can help to engage more participants, and will be particularly necessary when the targeted participants have negative attitudes, distrust institutions and already have diversified income streams (Sorice et al., 2018[88]). This highlights the importance of ensuring that programme design, monitoring and evaluation are grounded in science (Naeem et al., 2015[97]), and that there is information feedback between a programmes' outcomes and participants (Sorice et al., 2018[88]).
Social capital can also influence participation rates (Eichhorn, Kantelhardt and Schaller, 2024[98]; Nyborg et al., 2016[99]; Sorice et al., 2018[88]). For example, studies in California, United States, show that uptake of environmental practices tends to be higher where policy networks are stronger, while analysis of schemes in Ecuador concludes that social embeddedness is a strong predictor of participation, particularly where pre-existing norms of reciprocity exist (Grillos, 2017[100]). For example, expectations about neighbours’ inclination to enrol was a strong influencer on decisions to enrol in Ecuador’s SocioPáramo programme (Bremer, Farley and Lopez-Carr, 2014[101]). Similar observations have been made for the Grain-to-Green Programme in China (Chen et al., 2009[102]; Yost et al., 2020[85]). In Poland, the bad experience of neighbours in earlier schemes was commonly cited as a reason for not enrolling in agri-environmental schemes (Krzyszczak et al., 2023[103]).
In addition to micro (e.g. farmer/farm level) and meso-scale factors (e.g. community), macro-scale political and economic factors can influence participation and pose a barrier to voluntary conservation programmes (Stuart and Gillon, 2013[104]). Specifically, in California contracts between producers and private companies were found to constrain participation in conservation efforts and threaten achievement of state and federal water quality goals. In Iowa, United States, participation in conservation programmes was found to be vulnerable to market volatility, increases in commodity prices and policy efforts to increase biofuel production (Stuart and Gillon, 2013[104]). In both examples, the uptake of voluntary conservation approaches was linked to macro-scale policies and markets that influence environmental stewardship decisions.
Participation may also be limited if schemes are overly prescriptive or administratively complex. For example, the low uptake of the Prime Vert programme in Quebec, Canada, has been explained by the rigid rules regarding permitted activities and constraints on co-ordinated and collaborative actions, the administrative complexity and lack of support in the enrolment procedure (Zaga-Mendez et al., 2020[105]). Similarly, concerns about overly bureaucratic data registration procedures and low levels of support were cited as reasons for not enrolling in an agri-environmental scheme in Poland (Krzyszczak et al., 2023[103]), while in Germany the largest barrier to participation in agri-environmental schemes is the perceived bureaucratic burden (Massfeller et al., 2022[106]). Schemes should therefore seek simplicity and flexibility, while also ensuring environmental effectiveness and promoting cost effectiveness. Furthermore, they should ensure sufficient capacity to clearly communicate to stakeholders and support them with the enrolment process and scheme implementation. Knowledge support, training and advice could not only simply help build service providers’ confidence in their ability to deliver results and therefore their willingness to participate (Eichhorn, Kantelhardt and Schaller, 2024[98]), while also improving the success of schemes (Hagemann et al., 2024[107]).
To fulfil their potential, direct payment schemes need to be not just scaled up but also designed to be cost effective and environmentally effective. The effectiveness of payment schemes has been mixed. Analyses indicate that schemes have helped address biodiversity loss, for example by reducing deforestation rates and fragmentation, promoting forest regeneration and protecting farmland species and habitats (Alliance Environnement, 2019[108]; Alix-Garcia, Sims and Yañez-Pagans, 2015[109]; Arriagada et al., 2012[110]; Costedoat et al., 2015[111]; Honey-Rosés, Baylis and Ramírez, 2011[112]; Ramirez‐Reyes et al., 2018[113]). However, ex post evaluations indicate that considerable scope exists to increase environmental effectiveness and budgetary cost-effectiveness of biodiversity-positive subsidies and PES (Alliance Environnement, 2019[108]; Batáry et al., 2015[114]; Coderoni and Esposti, 2018[115]; Dal Ferro et al., 2018[116]; Hardelin and Lankoski, 2018[117]; Lankoski, 2016[118]; Shortle et al., 2012[119]). This section highlights the importance of effectively targeting and designing payments and enforcing conditionality. For further discussion of design and implementation considerations, refer also to earlier OECD work on agri-environmental payments and PES (OECD, 2023[120]; OECD, 2022[121]; OECD, 2010[7]).
3.4.1. Define clear objectives and adopt outcome metrics
Clearly defining objectives is fundamental for the successful implementation of direct payment schemes that are both environmentally and cost effective. Clear objectives help to guide the design of the scheme, enhance transparency and avoid ad-hoc political influence (OECD, 2010[7]). Specific, measurable objectives accompanied by outcome metrics are also necessary for evaluating whether policy goals have been achieved and adapting schemes where necessary (OECD, 2022[121]). However, these are often absent – particularly from publicly financed schemes – undermining the effectiveness of the schemes and efforts to evaluate their performance (Hanley et al., 2012[122]; Uthes and Matzdorf, 2012[123]; Wunder, Engel and Pagiola, 2008[124]).
Payment schemes can have a single objective or multiple objectives. For example, a PES scheme in Cambodia set the aim of protecting nests of nine threatened bird species in the northern plains (Clements et al., 2013[125]), while the Costa Rica example highlighted earlier aims to improve biodiversity, hydrological services, and carbon sequestration and storage. Some schemes also have social objectives such as poverty alleviation and rural development. Trade-offs can exist across objectives, for example, the optimal species of tree to plant for short-term carbon sequestration may be suboptimal for achieving hydrological or biodiversity objectives or even detrimental. Adding poverty alleviation objectives to environmental objectives may increase the cost of PES schemes or reduce their environmental effectiveness (Pagiola, Arcenas and Platais, 2005[126]; Pagiola, 2007[127]; Saint-Cyr et al., 2023[128]). When setting objectives and designing schemes it is, therefore, important to explicitly acknowledge and address trade-offs. Safeguards may be necessary to ensure that the pursuit of an objective does not have significant adverse environmental or social impacts.
3.4.2. Spatially target payments according to ecosystem service provision and threats
The production of ecosystem services and the threats to the biodiversity that underpins them are spatially heterogeneous. To increase both environmental and cost effectiveness, payments should target areas that produce high ecosystem services (Wünscher, Engel and Wunder, 2008[129]) and where threats to the supply of these ecosystem services are high (Alix-Garcia, de Janvry and Sadoulet, 2005[130]).
Despite its benefits, spatial targeting is not standard practice in direct payment schemes. Furthermore, schemes that do involve spatial targeting rarely consider threat levels. A global analysis of PES schemes found that approximately half used ecosystem service criteria for targeting, whereas less than 10% of schemes targeted payments based on predicted threat to ecosystems or probability of achieving change. Around 14% used both ecosystem service and threat criteria, while 31% had no explicit targeting (Wunder et al., 2018[20]).
The low share of schemes targeting areas based on a threat assessment is concerning as it could lead to adverse self-selection. Adverse self-selection is where pre-compliant landowners with zero costs of ecosystem service provision enrol in PES, undermining environmental additionality and cost effectiveness. It is a key challenge for biodiversity-positive subsidies and PES (Jack and Jayachandran, 2018[131]; Wunder et al., 2018[20]). For example, declarations from farmers benefitting from a watershed protection programme in Bolivia suggest that only 39% of the contracts to exclude cattle from riparian areas and 14% of the contracts to prevent deforestation were additional (Bottazzi et al., 2018[132]). In Brazil, the Bolsa Floresta scheme had a significant effect on forest conservation in some areas, but its overall impacts were relatively small due to enrolment of areas with low deforestation pressure and therefore low additionality (Cisneros et al., 2022[133]). In Mexico, the probability of receiving payments through the federal hydrological PES programme was inversely correlated with actual deforestation (Le Velly, Sauquet and Cortina-Villar, 2017[87]).
While better targeting payments can increase the complexity and administrative costs of schemes (McCann et al., 2005[134]), the benefits tend to outweigh the costs. For example, analysis of the Costa Rica’s national PES scheme concluded basic spatial targeting would increase administrative costs by 3.8% and total costs by 0.3% while increasing ecosystem service benefits by at least 14% (Wünscher, Engel and Wunder, 2008[129]). An analysis of the effectiveness of different payment schemes using field parameterised, ecological economic models of extensive grazing farms in the UK concluded that potential biodiversity benefits from improved spatial targeting and payment differentiation were sufficiently high to warrant an increase in implementations costs of 70% (Armsworth et al., 2012[135]). Further, digital advances are facilitating and reducing the costs of better targeted, results-based policies that have often been considered unfeasible due to high data requirements and transaction costs (OECD, 2019[136]; OECD, 2022[121]).
3.4.3. Differentiate payments where compliance costs vary considerably
Even within a targeted area, the potential environmental outcomes generated by participants and the costs they incur in delivering these outcomes can vary considerably. For instance, landowners with highly fertile agricultural land may experience greater opportunity costs when setting aside land compared to those operating on marginal agricultural land. When costs and benefits are heterogeneous, uniform payment structures may result in the overcompensation of farmers with lower compliance costs while failing to provide adequate incentives for land managers facing higher compliance costs – despite their potential to deliver significant environmental benefits (OECD, 2022[121]). This reduces budgetary cost effectiveness and results in adverse self-selection of participants. Differentiating payments according to compliance costs or environmental benefits may help increase a scheme’s cost effectiveness and environmental outcomes (Engel, 2016[137]; DeBoe, 2020[138]; Wünscher, Engel and Wunder, 2006[139]).
According to a global analysis, almost 60% of PES schemes differentiate payments (Wunder et al., 2018[20]). Differentiation tends to be based on the ecosystem service benefits provided rather than the costs of providing these benefits. In the most sophisticated programmes, payments are tailored to individual providers reflecting costs and benefits (e.g. French Vittel watershed PES), however, most PES schemes with differentiated payments have just two payment rates: a standard payment and a premium for strategic areas (Wunder et al., 2018[20]).
Differentiating payments requires information about the compliance costs of participants of providing ecosystem services. To estimate the opportunity costs of ecosystem service provision, and differentiate payments accordingly, administrators can obtain information on variables that affect opportunity costs (called costly-to-fake signals) such as agricultural prices, or they can use inverse auctions (OECD, 2010[7]).
Inverse auctions require potential ecosystem service sellers to submit bids indicating the minimum payment they are willing to accept for the provision of an ecosystem service. They have been used in programmes to protect old growth forests in Australia, conserve waterfowl in Canada, reduce soil erosion in Indonesia, and improve agri-environment practices and enhance wildlife habitat in the United States (OECD, 2010[7]). While administratively and logistically challenging, inverse auctions have a robust track record and can significantly improve cost effectiveness (Kindu et al., 2022[140]). For example, a local programme in the Conestoga watershed in the United States found that using inverse auctions resulted in a seven-fold increase in the reduction of phosphorus runoff per dollar spent compared to a fixed price approach (Selman et al., 2008[141]).
While differentiated payments are often advantageous, they may not be appropriate in some contexts. The extra information requirements of differentiated payments increase administrative costs, which can reduce the overall cost-effectiveness gains of differentiated payments. Differentiated payments are also often perceived as less equitable (OECD, 2022[121]). Therefore, where the costs and benefits are homogenous, uniform payments may be better suited (OECD, 2022[121]). Where the differences across ecosystem services is more pronounced, differentiated payments can help achieve the maximum environmental impact for a given budget.
3.4.4. Consider whole-of-property enrolment and collective payment schemes
The provision of biodiversity and ecosystem services generally relies on landscape-level management, often extending beyond a single land parcel and property boundaries. Schemes which require participants to enrol their entire property, rather than parcels of land, can be more conducive to protecting and restoring ecological functions and processes at scale. It can also reduce the risk of leakage, which is where changes in land management activities shift production and its impacts elsewhere (OECD, 2010[7]) (Box 3.10). For example, a randomized trial in Mexico found that full enrolment of properties reduced deforestation by 41% compared to the traditional contract approach where landowners choose parcels to enrol, quadrupling the cost effectiveness of PES (Izquierdo-Tort, Jayachandran and Saavedra, 2024[142]). However, the study also indicated that more stringent land enrolment could reduce the compliance rate.
In addition to whole-of-property enrolment, collective payment schemes hold promise (OECD, 2023[120]), particularly in places where collaborative traditions and accumulated social capital already exist (Wunder et al., 2025[143]). While targeting schemes to individual landholders is currently the norm, collective approaches may be more effective and efficient by delivering co-ordinated action at scale and potentially reduce the risk of leakage by preventing harmful activities shifting to adjacent sites (Burton and Paragahawewa, 2011[144]; Brouwer, Tesfaye, Pauw, 2011[145]; Engel, 2016[137]; OECD, 2022[121]). Collective contracts can have positive impacts on farmer participation, compliance, enforcement and overall cost-effectiveness by promoting normative behaviour and peer monitoring (Barghusen et al., 2022[146]; Brouwer, Tesfaye, Pauw, 2011[145]; OECD, 2022[121]; Sommerville, Jones and Milner-Gulland, 2009[147]; Wunder et al., 2025[143]). They can also be conducive to mutual learning and innovation through the exchange of good practices (Lastra-Bravo et al., 2015[148]; Mettepenningen et al., 2013[45]; OECD, 2023[120]).
Collective payments have been largely theoretical but are starting to emerge. The Netherlands is among the first countries to adopt such approaches. In the Dutch scheme, farm collectives receive agri-environmental payments and are responsible for managing implementation of measures in their area (Barghusen et al., 2022[146]). Forty agricultural collectives were registered in 2020, receiving a total of EUR 71 million in 2019 to cover lost income and related costs (LEI International Policy/LEI Performance and Impact Agrosectors, 2022[149]; LEI International Policy/LEI Performance and Impact Agrosectors, 2022[149]). The approach is considered effective, flexible, cheaper and with less error than previous agri-environmental payments (Terwan, 2016[150]). Individual contracts with collective bonuses, as applied in Hungary and the German state of Schleswig-Holstein, may provide similar advantages but potentially with higher average costs (Termansen et al., 2024[151]; Wunder et al., 2025[143]).
Leakage in biodiversity policy refers to the unintended displacement of environmental harm caused by well-intended policies or projects. PES, subsidies and other policy measures can shift harmful activities elsewhere to unregulated areas, diminishing their intended benefits. Studies suggest leakage is widely underestimated, leading to interventions that fail to deliver net environmental gains or, in some cases, result in unintended negative consequences.
Leakage can occur at different scales, including within a property, at a local or landscape scale – or even globally. Larger-scale leakage is shaped by market dynamics. For example, restricting logging in one country may increase timber imports from areas lacking sustainability standards.
Addressing leakage requires more rigorous assessment and risk mitigation to ensure interventions contribute meaningfully to global biodiversity objectives. For localised leakage, approaches such as whole-property-enrolment and collective payments, accompanied by monitoring that extends beyond intervention boundaries – as done in Mexico’s PES scheme – could be beneficial. More generally, integrated land-use planning and strengthened regulatory frameworks may help reduce the impact of leakage, while promoting sustainable supply chains and reducing demand for biodiversity-intensive products could help tackle global leakage.
Knowledge, awareness and efforts to mitigate leakage in biodiversity policy are typically low. As biodiversity-positive incentives scale up, targeted research, improved risk assessment tools, and adaptive policy designs will be essential to maximising effectiveness and ensuring long-term success. Without addressing leakage comprehensively, biodiversity gains risk being offset elsewhere, reducing their overall impact.
Source (Balmford et al., 2025[152]), Time to fix the biodiversity leak, https://eprints.whiterose.ac.uk/id/eprint/223903/1/Leakage_essay_revised.pdf; (Filewod and McCarney, 2023[153]); Avoiding carbon leakage from nature-based offsets by design, https://doi.org/10.1016/j.oneear.2023.05.024; (Lim et al., 2017[154]), Perverse market outcomes from biodiversity conservation interventions, https://doi.org/10.1111/conl.12332; (OECD, 2010[7]), Paying for Biodiversity : Enhancing the cost-effectiveness of payments for ecosystem services, https://doi.org/10.1787/9789264090279-en; (Zhong et al., 2024[155]), Global spillover effects of the European Green Deal and plausible mitigation options, https://doi.org/10.1038/s41893-024-01428-1.
3.4.5. Increase the use of results-based and hybrid payments
Payments can be practice-based, results-based or a hybrid of the two. When designing payment schemes it is important to identify which approach strikes a balance across cost effectiveness, environmental outcomes, and participants’ preferences (OECD, 2022[121]). One of the cited reasons for the underperformance of direct payment schemes is that most are practice-based rather than performance or results-based (OECD, 2022[121]), and the link between the incentivised practices and environmental outcomes is often tenuous. Results-based payments can address this by ensuring positive environmental outcomes are achieved and provide land users with the flexibility to choose which actions they undertake (Canessa et al., 2023[156]; Hagemann et al., 2024[107]; McDonald et al., 2018[157]). They also incentivise participants to enrol land that is more likely to achieve environmental outcomes, reducing the risk of adverse self-selection (Canessa et al., 2023[156]).
While results-based payments can be more environmentally effective and cost effective than paying for management practices (Hanley et al., 2012[122]; Wuepper and Huber, 2021[158]), they may – depending on their design – have higher (perceived) risks for land users and increase administrative costs, such as those associated with establishing clear baselines and monitoring environmental improvements (Eichhorn, Kantelhardt and Schaller, 2024[98]; OECD, 2022[121]). This may deter participants or lead them to demand higher payments to cover associated risks (Niskanen et al., 2021[159]; OECD, 2022[121]).
Overall preferences of land managers for practice-based or results-based approaches are ambiguous (Canessa et al., 2023[156]). For example, a choice experiment with farmers (arable and mixed livestock and arable farmers) in Finland, the Netherlands, and Sweden reveals preferences for practice-based schemes over results-based ones (OECD, 2022[121]), whereas farmers in Slovenia expressed preference for a result-based approach over management-based scheme (Šumrada et al., 2022[160]). Hybrid approaches that include payments for management practices and a supplement for delivery of the desired outcome may offer the best compromise between budget constraints and the need for effective participation (OECD, 2022[121]). Ireland provides an example of how results-based payments can be established and integrated with practice-based payments (Box 3.11).
LIFE Integrated Project Wild Atlantic Nature
Building on a long history of results-based agri-environmental payments (RBPS), Ireland initiated a pilot RBPS in 2021 under the European Union funded LIFE Integrated Project Wild Atlantic Nature. The scheme works with farmers, local communities and landowners to improve the quality of blanket bog habitat (peatland) and surrounding habitats, important for biodiversity and a range of ecosystem services such as carbon storage, flood protection, and the provision of drinking water and food. The LIFE project covers 260 000 hectares (ha) and 35 Special Conservation Areas (SACs). The RBPS component covers 63 000 ha and encompasses 8 SACs. Most of this land has low productivity and is dominated by sheep farming.
To achieve its objective, the RBPS has distributed EUR 3 million in payments to farmers on private land and commons. Farmers can receive two types of payments: results-based (which account for >93% of the budget) and practice-based. All participating land is divided into plots, each receiving an annual habitat score from 0 to 10 based on its environmental condition. The scoring is guided by a scientifically grounded yet user-friendly habitat scorecard. The score determines the results-based payment levels. For common lands the payment is split across the users. To ensure additionality, farmers only receive payments if they score above three on the habitat scorecard, which is the score they are assumed to attain under the Common Agriculture Policy (CAP) conditionality rules under pillar one area-based payments.1 The payment increases with the score, but farmers have an extra financial incentive to achieve a score of eight or higher (Figure 3.1). In addition to results-based payments, famers can receive practice-based payments for voluntary measures they adopt to improve the habitat quality. The scorecard becomes a management tool, helping farmers to identify areas for improvement and the actions to adopt, and to monitor the effectiveness of their actions.
Source: (Wild Atlantic Nature, 2021[161]), LIFE IP Wild Atlantic Nature Results-Based agri-environment Scheme, https://www.wildatlanticnature.ie/wp-content/uploads/2022/03/Wild-Atlantic-Nature-RBPS-information-booklet-May-2021.pdf.
Over 820 farmers benefit, which represents an enrolment rate of >85%. Several factors may explain this high rate of enrolment. First, the scheme is designed with farmers at the centre. Prior to launching the payments, the government and its advisory services held various meetings with individual farmers and farmer associations, particularly in the most contentious areas, to explain the scheme. Second, due to the design and the well-developed advisory system in Ireland the administrative burden is relatively low. All that is required by farmers is proof of land ownership and participation in a one-day training. Trained farm advisors support farmers in scoring the land and identifying actions they could take to improve environmental condition. The advisors are monitored to ensure accurate and fair application of the scorecard. Third, since the land under the scheme is relatively unproductive and many farms are loss-making, the agri-environmental payment is an important source of income for farmers.
Building on this and other RBPS in the country, Ireland is scaling up results-based payments through its Strategic Plan 2023-27 under the CAP. Currently, 20 000 farmers nationwide receive results-based payments through CAP Pillar 2 funding for enhancing the environmental condition of their land. This support covers over 1.1 million ha of high-nature-value land, including 85% of the terrestrial Natura 2000 area. In response to increasing interest from farmers, the government is supplementing RPBS with non-CAP funding and conducting training of local operatives to support conservation and large-scale restoration actions on the ground. This is being facilitated by policy alignment and collaboration between the national authority for nature (the National Parks and Wildlife Service) and the agriculture ministry (Department of Agriculture, Food and Marine).
1. Statutory Management Requirements (SMRs) and Good Agricultural and Environmental Condition (GAEC).
Source: (Douthwaite et al., Forthcoming[162]), Pilots, proponents and policy windows: How Results-Based Payment Schemes (RBPS) became mainstream in Irish agri-environmental policy; (Goggins, 2024[163]), Ireland's experience with RBPS under LIFE IP Wild Atlantic Nature. https://www.slideshare.net/slideshow/workshop-on-scaling-up-biodiversity-positive-incentives-gary-goggins/272855646; (Goggins and McLoughlin, Forthcoming[164]), Exploring the interplay between context and project effects: A case study on a hybrid results-based agri-environment scheme in Ireland; (Wild Atlantic Nature, 2021[161]), LIFE IP Wild Atlantic Nature Results-Based Agri-environment Scheme (RBPS) Information booklet, https://www.wildatlanticnature.ie/wp-content/uploads/2022/03/Wild-Atlantic-Nature-RBPS-information-booklet-May-2021.pdf; (Wild Atlantic Nature, 2025[165]) LIFE IP Wild Atlantic Nature, https://www.wildatlanticnature.ie/.
3.4.6. Enforce conditionality to improve environmental outcomes and cost effectiveness
Both environmental and cost effectiveness can be improved by making payments conditional on achievement of the agreed actions, practices, performance or results specified in contracts (OECD, 2022[121]; OECD, 2010[7]). Without conditionality, payments may be made without any significant change in behaviour or improvement in environmental outcomes. Moral hazard poses a risk in subsidy and PES programmes as land managers, particularly those with high compliance costs, might be tempted to accept compensation without fulfilling their commitments (Hart, 2005[166]).
While conditionality is a defining feature of PES, its enforcement varies considerably across schemes and is often lacking. Two-thirds of PES initiatives globally comprehensively monitor compliance, while only a quarter of schemes consistently sanction participants (e.g. reduce or discontinue payments) when non-compliance is detected (Wunder et al., 2018[20]). A further quarter enforce rules partially while almost half of the cases have never penalised non-compliance (Wunder et al., 2018[20]). Studies of agri-environmental schemes in developed countries have found low rates of both monitoring and enforcement (OECD, 2010[7]; Wunder, Engel and Pagiola, 2008[124]).
Effective monitoring and enforcement are crucial to detect and penalise non-compliance, for example by cancelling future payments or requiring repayment of past ones. However, monitoring can be challenging and expensive (Bauchet et al., 2020[167]; OECD, 2022[121]), while excessive penalties can discourage participation rather than promoting compliance (Börner et al., 2017[168]; Engel, 2016[137]). It is therefore necessary to balance the intensity of monitoring, the level of sanctions, the stringency of compliance requirements and the payment amounts to ensure high compliance and participation rates (OECD, 2022[121]). Encouragingly, data and technology developments can help to reduce the cost and increase the efficiency of monitoring (OECD, 2022[121]). One such example is using drones to spot mating bird pairs, as a results-based indicator (Thiermann et al., 2023[169]).
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← 1. N.B. The term “direct payments” is also used in agricultural policy in a narrow sense to refer to payments to farmers based on current or past area of agricultural land (see e.g. rules under the EU Common Agricultural Policy). This is not what is intended here nor is it how OECD employs the term when analysing agricultural support.
← 2. Alternative definitions of PES exist, however, they tend to be much broader, encompassing a wide spectrum of policy instruments, and they therefore impede analysis and the generation of focused insights.
← 3. The emphasis on off-site is important for two reasons: 1) onsite ecosystem services lend themselves better to other mechanisms such as entrance fees or hedonic accommodation surcharges); 2) onsite ecosystem services benefit the landholder themselves providing in theory intrinsic motivation to provide these.
← 4. Government-financed PES schemes may, however, also align with the polluter pays principle, for example where PES raises funds through carbon taxes.
← 5. Subsidies determined to be government-financed payments for ecosystem services are excluded here.
← 6. Unless a specific reference is provided, the examples are drawn from the OECD’s PINE database (OECD, 2024[9]).
← 7. Climate change was the primary focus of the use of proceeds from Zambia's inaugural green bond issuance, however there were some co-benefits for biodiversity through the mitigation of deforestation, a major driver of ecosystem loss. Furthermore there is advocacy for further use of proceeds to support biodiversity in the future (BIOFIN, 2024[170]).
← 8. Investment in innovation by itself is not enough to find solutions that reconcile both productivity and environmental sustainability outcomes. Conducive policy settings are needed to ensure environmental objectives are achieved.
← 9. When permits are auctioned (see Chapter 5).
← 10. Mainly OECD and G20 countries, which collectively emitted approximately 80% of global GHG emissions in 2021.
← 11. While it may not be feasible to value all ecosystem services in monetary terms or identify willing buyers, bundling can help accommodate nonmarketable services even if it does not result in a premium for land managers. Offering a diverse bundle that explicitly identifies valued services and benefits may also facilitate market entry (von Hase and Cassin, 2018[83]).
← 12. Increasing participation numbers may improve the environmental impacts of a PES scheme or undermine it, depending on the approach taken. For example, lower payment rates may allow more participants for the same budget but lowering payment rates might lead to adverse self-selection bias where only those already providing services enrol, reducing additionality.