Agriculture are argueably is the human activity that has the largest impact on the world, impacting many ecosystem services. However, most farmers have minimal financial incentive to enhance ecosystem services other than crop yield. WRI Earthtrends reviews the evidence that Expanding Agriculture and Protecting Ecosystems: Can Payments to Farmers Accomplish Both?

How can farmers be encouraged to reduce these negative side-effects, while also meeting the growing demand for food and fiber?

Paying Farmers for Ecosystem Services

Farmers constitute the largest group of natural resources managers in the world–agriculture accounts for over 40% of global employment. The concept of paying farmers for the ecosystem services they provide, thereby creating a financial incentive for environmental protection, is an approach generating increasing support worldwide. In fact, the FAO’s State of Food and Agriculture Report 2007 provides an in-depth analysis of this concept, highlighting its great potential as well as existing challenges.

Farmers can generate enhanced environmental services in three main ways:

* Changing methods of production
* Diverting current agricultural land to other uses
* Avoiding future conversion of new land to agriculture

Examples of Payment Systems around the World

The demand for environmental services has been increasing over recent decades, both due to greater awareness of their value and to their increasing scarcity. Consequently, many industrialized countries have already implemented programs providing farmers with payments for environmental services. In the United States, for example, farmers can elect to receive annual rental payments for retiring farmland from crop production for 10 to 15 years, thereby enhancing soil conservation. Similarly, farmers in the United Kingdom can receive compensation payments for adopting less intensive farming practices.

One of the most notable programs in the developing world was established in Costa Rica in 1996. To enhance forest environmental services (i.e. carbon sequestration, watershed protection and biodiversity protection), land and forest owners receive compensation payments for reforestation, sustainable forest management and forest protection. The program is financed via a fossil fuel sales tax and revenues from hydroelectric companies, among other sources. Similarly, China’s “Grain for Green” program pays farmers to plant forests on sloping and degraded lands.

Policy Design Issues and Challenges

Environmental payment schemes have great potential but must overcome several implementation challenges. A successful approach must create a mechanism for measuring and valuing a service, identify how and where to enhance services most cost-effectively, and decide which farmers to compensate and how much to pay them. In some situations, it may make sense to use alternative policy approaches, such as reforms to reduce agricultural market distortions or command-and-control regulations. No matter what strategy is adopted, the FAO emphasizes that poverty implications must be kept in mind. Most of the world’s poor people live in rural areas and are dependent upon agriculture and their natural resource base for survival–any plan to implement payments for environmental services will have both positive and negative impacts for the poor that must be considered.