Sustainable use of sloping lands and watersheds requires ways to link downstream effects (negative or positive) to the decisions made upstream. The concept of ‘payments for environmental services’ and the use of market-based institutions for such is gaining ground. In this paper we will review the conceptual basis of such mechanisms and the existing array of institutional innovations in both insular and mainland Southeast Asia. Markets are by definition realistic, voluntary and conditional. Their effects on poverty are mixed. Many environmental issues and the increasing scarcity of ecosystem services are linked to ‘market failure’. Time-lags, complex cause-effect and multiple layers of rights and responsibilities of environmental issues make ‘service’ considerations externalities of decision making processes that are focussed on ‘marketable goods’. Which combination of characteristics, short of full markets, is needed for effective, efficient, sustainable and equitable mechanisms to avoid environmental degradation beyond thresholds of sustainability? Are pro-poor market-based mechanisms possible? We set out to identify mutually beneficial opportunities for ‘modifiers’ and ‘beneficiaries’ of environmental services to interact as an alternative to a purely regulatory approach to environmental issues. The domain for voluntary, conditional rewards for environmental services (ES) is constrained by existing regulations and the rights it specifies to a share in the available ES (including the ES of buffering against pollution or the transfer of rainfall to usable water flows). We combined principles and insights from social welfare theory (development and environmental economics and project appraisal), institutional economics (principal agent problems, game theory) and integrated natural resource management approaches with emerging experience in action research sites and pilot application schemes to obtain a general framework of criteria and indicators, a consistent terminology and to clarify the multiple pathways (8 identified so far) and challenges of poverty reduction through reward and compensation mechanisms. Two main classes and four main criteria were formulated. The first class relates to the effectiveness, efficiency and sustainability of the CRES institutions, with the environmental services as the primary target and criteria that relate to three questions (Would rewards be realistic? Will they be voluntary? What conditionality will apply?) that predominate in the scoping, takeholder analysis and negotiation + implementation stages, respectively). The second class is aimed at the equity dimension with also three main questions (Is poverty linked to ES issues? Who is/will be excluded? Are the rewards ‘pro-poor’?) for the three stages.
