Can combining two environmental services under a single PES program result in better environmental outcomes and lower costs?

This paper develops an integrated framework for modeling payment for ecosystem services (PES) mechanisms that deliver multiple environmental services. Specifically, under a community‐led PES, forest conservation is promoted to deliver carbon and stream water benefits. The upstream community is paid for avoided fuelwood harvesting through a United Nations programme on reducing emissions from deforestation and forest degradation (REDD) program, whereas additional income is generated from water sales to the downstream communities. A bio‐economic model derives optimal level of fuelwood harvesting, which in conjunction with the changing species composition of forests, streamflow hydrology and fire risks, impacts on the carbon and water generation potential of the PES project. Results indicate that forest conservation outcomes are better when water and carbon services are combined, however overall cost to the program is lower under a carbon‐based PES. Changing species composition of forests creates tradeoffs between water and carbon benefits. Forest fires further challenge the viability of PES schemes through reducing streamflow and carbon sequestration potential.