The purpose of Payments for Ecosystem Services (PES) tools is to develop new markets for ecosystem services that have formerly been undervalued or overlooked.

It is one of many tools that can be applied where the value of one or more services has been identified, where there are potential consumers of that service and providers. PES enables the beneficiaries (or prospective ‘buyers’) of that service to engage in dialogue with the owners or managers of habitats whose actions can protect or enhance the service for mutual benefit.

PES is a market-based approach founded on creation of markets linking the ‘suppliers’ of ecosystem services with their ’users’/’consumers’. Some services (mainly provisioning services) are already traded, including for example fresh water and food. However, most ecosystem services are external to today’s market, yet are crucial for ecosystem resilience and supporting society’s needs now and into the future (e.g. pollination and nutrient cycling). Valuation of these many formerly omitted ecosystem services is now essential for their effective incorporation into decision-making. Development of PES markets offers one means to recognise, internalise and protect these valuable services.

The process to establish a PES scheme can be a valuable process in terms of eliciting vital ecosystem services in their wider context and encourages long-term thinking through devising management incentives now to benefit the integrity and health of the ecosystem function. PES can be effective in bringing together stakeholders that may not usually converse and develop management strategies based on ecosystem science.

PES is well established around the world covering issues as diverse as water quality and quantity, flood risk, biodiversity, carbon sequestration, valued landscapes and access for amenity. Its potential uses are very broad and may appeal to many. 

• When? The value of a particular service, or set of services, has been identified and the PES approach is cheaper than other means to secure it.
• Why? To create market mechanisms to secure or enhance service production.
• How? As a flexible mechanism within which specific tools are developed with all affected parties to realise a market value for environmental resources and services.
• Who? Key relevant parties are: (1) potential service users/beneficiaries, (2) service producers/ protectors, (3) brokering of informing a potential market.
• Where? Wherever it is recognised that the continued provision and maintenance of an ecosystem service depends on specific management steps that can be better guaranteed if a (contractual) payment system is established and where there is a clear pathway from cause to effect.

PES addresses only the market value of ecosystem services; the intrinsic value is not readily addressed. It is important that one target service is not protected or enhanced at the expense of other services and their associated beneficiaries, and that PES fits within wider strategies and societal agreements, even where cemented as a private market agreement.

‘Thinking Upstream’ is a programme of catchment-based water quality protection forming part of water industry investment by South West Water, the water service company for the south west of England. Under ‘Upstream Thinking’, land users are rewarded for their cost-effective impact on provision of cleaner water, as compared to the costs to water providers of cleaning up dirtier water downstream. PES agreements do not replace, but kick in as an addition beyond, mandatory requirements upon farm businesses. PES is central to the operation of ‘Upstream Thinking’, with the Westcountry Rivers Trust, an NGO, acting as a trusted intermediary between the water service company and the many land managers in target catchments with important surface water abstractions. Various economic tools are used to target payments, including for example reverse auctioning (where potential ‘sellers’ compete for funds to deliver catchment improvement benefits in the most cost-effective way).

The Ecosystem Approach is central to ‘Upstream Thinking’, safeguarding critical ecosystem services (physico-chemical water quality regulation, the supporting service of nutrient cycling, the provisioning service of fresh water, etc.) with co-benefits for a range of services (including habitats for wildlife, contribution to ecotourism, enhanced fisheries, etc.). This is achieved by setting the services in an economic context in living landscapes and ensuring the participation of key stakeholder groups in scheme design and operations within catchments. OFWAT, the economic regulator of the water industry, accepts that there is significant benefit relative to the costs of ‘cleaning up’ more contaminated water at the point of abstraction in ‘Upstream Thinking’ target catchments. This economic benefit ratio is purely for the focal service of fresh water, with wider catchment enhancement and its associated ecological, cultural and other benefits not factored in. The cumulative value of this broad range of co-benefits is far larger. ‘Upstream Thinking’ represents a significant change in the way the UK water industry has previously operated, and been regulated, requiring persistence on the part of the water company and NGOs to champion the approach through the political process. However, lessons in terms of net societal benefit (for wider services) and targeted economic benefit are clear. These lessons have generic relevance to water industry investment, much of which remains narrowly focused.

Read more about this case study

Defra’s (2013) Payments for Ecosystem Services guidance