Fact Sheet FS1374
What is Payment for Ecosystem Services?
Payment for Ecosystem Services (PES), also known as Payment for Environmental Services (International Institute for Environment and Development 2021), is the compensation for voluntary action taken to improve an ecosystem’s ability to provide benefits to society, including but not limited to "water purification, flood mitigation, or carbon sequestration." (Jack et al. 2008). The benefits of ecosystem services are generally categorized into four buckets (Fig. 1): cultural (e.g., recreation, science and educational, spiritual); supporting (e.g., soil formation, pollination, nutrient cycling); provisioning (e.g., food, raw materials, genetic resources); and regulating (e.g., carbon sequestration, waste decomposition). (Kaplan et al. 2021) In addition to these four types of services, indirect benefits - referred to as co-benefits - include but are not limited to: "improved public health, enhanced biodiversity, and creation of green jobs." (Kaplan et al. 2021) These co-benefits and the financial compensation provided by PES policies are the motivators for participation in these market-based incentive programs.
Figure 1. The four categories of benefits of ecosystem services, examples of each, and co-benefits of payment for ecosystem services.
How Can PES Programs Be Used to Address Climate Change in Agriculture?
There are three primary types of PES programs that can be used to address climate change: compliance programs, voluntary markets, and practice-based incentive programs. For agriculture, these programs provide opportunities to either reduce greenhouse gas emissions (for example, avoided emissions of greenhouse gases through reductions in fertilizer use and its manufacture) and/or to increase uptake of carbon dioxide from the atmosphere and sequester its carbon in plants and soil through management practices and methods that increase soil organic matter, including reduced tillage, crop choices, grazing management, and soil amendments (See NJAES Fact Sheet 1375, Sequestration of Carbon on Agricultural Lands). For other types of natural and working lands, these programs provide opportunities to address climate change through woodland preservation programs and working-land-to-woodland conversion (reforestation/afforestation) programs that sequester carbon among other ecosystem services.
Figure 2. General steps in payment for ecosystem services in the context of soil carbon markets. Source: Indigo Ag.
Compliance Programs
Regulatory compliance programs that provide opportunities for ecosystem service valuation include market-based programs such as greenhouse gas emissions cap-and-trade programs and incentive-based programs that are coupled to water quality/pollutant reduction regulatory programs. (Kaplan et al. 2021)
Cap-and-trade programs have been used to limit air pollution and put a cost on it, creating value for clean air and a market for allowances and offsets. A cap is established for pollution limits that are ratcheted down over time (i.e., they are made more restrictive) to achieve an emission reduction goal. Allowances, which are in the form of a certificate or permit, allow a regulated entity to emit pollutants, for example carbon dioxide emissions. Allowances are purchased at auction, but entities are also able to trade allowances on secondary markets. (Fornaro et al. 2009; The Regional Greenhouse Gas Initiative 2021; California Air Resources Board 2021a). A regulated entity can meet its cap-and-trade obligations through emissions allowances by reduction of on-site emissions, or through the use of offsets that can be purchased to meet regulatory requirements. Offset provisions represent a project-based greenhouse gas emission reduction outside of the capped regulated sector. Offset project types in U.S. compliance markets that are related to natural and working lands include: avoided agricultural methane emissions from livestock and forest projects that sequester carbon (e.g., reforestation, improved forest management, avoided conversion, and urban tree planting). These projects must meet strict protocols and standards established by the regulatory agency. At a minimum, they must comply with "PAVER" requirements, meaning they are: Permanent (non-reversible, lasts in perpetuity); Additional (beyond business-as-usual); Verifiable (measurable, must be confirmed and monitored); Enforceable (clearly defined, exclusive ownership); and Real (the offset project results in a true net reduction of emissions as opposed to shifting emissions to another location). (N.J.A.C. 7:27C.)
Payment for ecosystem services in cap-and-trade systems can be achieved through one of two mechanisms. The first is through development of ecosystem service value offset projects that generate credits for sale; purchasers of the credits can resell them in the marketplace or "retire" them to meet regulatory requirements. The other mechanism is to use the revenue generated from the auction of allowances to advance climate progress; in the case of New Jersey, revenue generated from New Jersey’s cap-and-trade program (Regional Greenhouse Gas Initiative) has been invested in strengthening New Jersey’s forests and coastal wetlands (blue carbon) projects that sequester carbon. (New Jersey Economic Development Authority 2023)
Incentive-based regulatory programs can include regulated water quality programs. Like cap-and-trade programs, regulated water quality programs are based on a legally defined limit of pollution and also provide room for further advancement of climate progress. One example is Maryland’s Water Quality Trading Program (WQTP), which allows businesses to purchase pollution reduction credits to meet the total maximum daily load limit (TMDL), "the maximum amount of a pollutant allowed to enter a waterbody so that the waterbody will meet and continue to meet water quality standards for that particular pollutant." (United States Environmental Protection Agency 2021). Regulated entities can also create pollution reduction credits by decreasing the release of pollutants to some amount less than what is allowed by their permit. Nonregulated entities can generate and get paid for credits by providing a variety of ecosystem services, such as oyster aquaculture, planting of urban trees, and restoring nontidal wetlands. (Kaplan et al. 2021) Farmers can participate in these programs through practices like planting cover crops that reduce nutrient leaching but also have carbon-sequestering benefits.
Another model of regulatory incentive-based program is Pennsylvania’s Resource Enhancement and Protection program (REAP). This program provides state tax credits for those who utilize conservation best management practices (BMPs) to reduce nitrogen, phosphorus, and sediment pollution runoff. (Kaplan et al. 2021) These BMPs include, but are not limited to, no-till agriculture, crop rotation, and planting of cover crops.
Voluntary Carbon Markets
In voluntary carbon markets, producers are paid for benefits of natural and working lands associated with reduction of greenhouse gas emissions in the absence of a regulatory requirement. Demand can be driven by private sector companies and institutions (e.g., universities) who have made commitments to meet carbon reduction goals. Typically, voluntary projects comply with protocols of third-party standards, and emissions reductions are verified by third-party auditors. These standards also include the "PAVER" requirements: Permanent, Additional, Verifiable, Enforceable, and Real.
Figure 3. Cover crops planted into small grains. Photo credit: U.S. Department of Agriculture, NJ Natural Resources Conservation Service State Office.
Financial market drivers include institutional investors concerned about climate change and those who see it as a risk. To address these perceived risks, many businesses are practicing Corporate Social Responsibility (CSR), a management concept "whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders." (United Nations Industrial Development Organization 2021) Due to the lack of standards in quantification, verification, reporting, and goal setting, several frameworks have been developed to improve transparency around CSR goals and outcomes, including Science Based Targets Initiative and Carbon Disclosure Project. Corporate Social Responsibility initiatives have businesses investing in their own supply chain to meet their targets. These supply chain emissions – not directly under the control of the business - are known as Scope 3 emissions. Corporations that source products from farmers seek to reduce these Scope 3 emissions by providing financial incentives for farmers to implement practices like cover cropping or no-till, and they also may provide training, recognizing that helping their farmers address climate change through practices that improve resiliency is essential to maintaining their own operations, all important co-benefits.
Higher education institutions are also participating in voluntary carbon markets. Universities can be credit buyers to achieve carbon neutrality goals. They may also participate in the generation of their own offsets, including agricultural projects like swine waste-to-energy projects and carbon sequestration projects such as wetlands restoration. (Figure 4)
Practice-Based Incentive Programs
Figure 4. Hog waste lagoon at Loyd Ray Farms’ swine-waste-to-energy processor as part of a Duke University project. The cover over the far pit captures methane emitted during anaerobic digestion of swine manure, which is converted into biogas used to generate electricity. Photo credit: James Morrison.
Practice-based incentive programs provide financial compensation for the voluntary adoption of certain conservation practices. These practice-based programs seek to incentivize generational behavior change and therefore do not pay for practices indefinitely. As opposed to market forces driving the payments, financial incentives are provided by both governmental and non-governmental organizations.
Government-supported practice-based incentive programs can reward farmers for various conservation practices that increase soil carbon as well as reduce emissions of greenhouse gases. Such practices could include, for example, no-till, reduced till, mulching, compost application, and conservation plantings. (California Air Resources Board 2021b) There are also nongovernmental organizations that provide grants to farmers to implement conservation practices such as no-till agriculture, cover cropping, or integrated cover cropping with livestock management, as some examples. (Kaplan et al. 2021) These funds are often necessary for purchase of new farming equipment/implements designed for conservation practices, such as a no-till drill planter or a cover crop roller-crimper.
Additional Resources
- Farmland Assessment Overview
- Ecosystem Service Valuation Approaches and Carbon Mitigation Considerations for Garden State Agriculture
References
August 2025
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