The payments for ecosystem services (PES) is a mechanism seeking “to reconcile conflicting interests through compensation” (Wunder, 2005, p.1) and it links beneficiaries of environmental services with landowners whose land provides such services. The basic principle of PES is that service providers “should be compensated for the cost” of providing environmental services whether these costs are “direct costs of specific land use practices or more indirect opportunity costs of avoiding certain activities or types of land use” (Gutman, 2003, p.27).

In watershed-related PES programs, upstream land users and downstream service users or beneficiaries are two main groups of participants, and the downstream service users tend to be better off than upstream land users (Pagiola et al., 2005). One concern over PES is how the mechanism can contribute to poverty reduction in upstream watershed areas (Gutman, 2003; Pagiola et al., 2005). Payments can be either voluntary (such as direct payments between buyers and sellers) or regulatory (for example, beneficiaries paying taxes or water tariff) (Gutman, 2003). In most PES programs, end service users do not participate directly in negotiating payments for service providers, and intermediaries such as water companies make the payments either from their current revenues or by charging water consumers additional fees (Pagiola et al., 2005). When charging such fees, block pricing can be considered as a way to mitigate possible negative impacts on the poorer urban populations (ibid.). Governments and sometimes international Non-governmental Organizaitons (NGOs) also deliver or organize PES schemes.

Costa Rica is a pioneer of PES in developing countries and it has established “a formal, country-wide program of payments” (Pagiola, 2008, p.712) involving payments for water services, carbon, biodiversity and provision of scenic beauty (Haskett & Gutman, 2010; Pagiola, 2008). Financing of the programme is from a tax on gasoline and contributions from the private sector, etc. (Redondo-Brenes & Welsh, 2006). For water service payments, agreements between the National Fund for Forest Financing (FONAFIFO) and a number of water users such as hydropower producers were reached for those water users to pay for participating land owners in relevant watersheds (Pagiola, 2008). In those voluntary agreements, there are strong financial links between water users and service providers (Haskett & Gutman, 2010). In 2005, the water tariff was revised and a compulsory conservation fee for watershed conservation was proposed to be included in the water tariff (Pagiola, 2008). At local level, Heredia Public Service Enterprise (ESPH), the main water authority in the region of Heredia introduced in 2000 in residents’ water bill a hydrological fee which appears in a separate column (Redondo-Brenes & Welsh, 2006). Under this compulsory payment mechanism better investment can be made in priority watershed areas; there are local and direct benefits which both watershed ecosystem providers and beneficiaries can see, which activates their interest and responsibility; the administrative cost is lower than the national level PES programme (ibid.).

In Quito, Ecuador’s capital and a city with a population of more than 1.5 million, a trust fund called FONAG was established and returns on investments of the fund provide payments to landowners in the city’s watershed area for watershed protection measures (Postel & Thompson, 2005). Voluntary contributions to FONAG were provided by downstream beneficiaries such as hydroelectric power stations and irrigators, but to include more contributors it is still necessary to establish links between benefits and watershed protection measures (ibid.). In addition, PES programs are also initiated on communal lands, in which the Ecuadorian Government makes direct payments to poor farmers and communities for adopting conservation practices (Hayes et al., 2015). The research by Hayes et al. (2015) find that local organizational capacity and programmatic characteristics (such as contract conditions and penalty, etc.) are very important for PES programs targeted for collectedly-owned lands. Attention should also be made regarding how programs target communities and farmers who have more interest in joining and who are more likely to make change (ibid.).  

In New York City, water suppliers are required to filter drinking water under the US Safe Drinking Water Act unless they can provide evidence that quality of water from their watersheds meets water quality standards (Postel & Thompson, 2005). The city then decided to invest in the watershed protection programme. The programme involves land acquisition, watershed regulations and innovative watershed partnership (Vintinner, 2008). Funding of the programme is from taxes on water bill and bonds issued by the New York City Government (Postel & Thompson, 2005). In the negotiation process of the programme, various stakeholders including communities living in the watershed area and residents in the New York City were involved (Vintinner, 2008).

The payments for ecosystem services in watersheds is often referred to as watershed eco-compensation by governments and academic communities in China (Liu et al., 2008). Most PES programs in China are funded by governments, which fits the unique institutional contexts in China such as the public (communal and collective) ownership and administrative status (multiple government agencies involved) of natural resources (Pan et al., 2017). Private sectors only contribute a small proportion of the funding. The government-led PES initiatives in China are not very effective in motivating beneficiaries of ecosystems services to participate in conserving those ecosystem services. The private sector and individuals both have a greater role to play (Zhang et al., 2010; Pan et al., 2017).

In PES programs that target watershed management for drinking water in China, the term downstream beneficiaries usually refer to water users and governments, while upstream service providers may be local governments, communities and households (Zhang et al., 2010). Compensation is given in return for zoning restrictions and land-use restrictions in upstream watersheds (ibid.).