In its annual publication, The State of Food and Agriculture 2007, FAO noted that agriculture employs more people and uses more land and water than any other human activity.
"It has the potential to degrade the Earth's land, water, atmosphere and biological resources or to enhance them, depending on the decisions made by the more than two billion people whose livelihoods depend directly on crops, livestock, fisheries or forests, FAO director-general Jacques Diouf said in the report.
Ensuring appropriate incentives for these people is essential, he said, adding payments can take different forms as voluntary transactions involving farmers, communities, taxpayers, consumers, corporations and governments.
They could be direct payments by governments to producers or indirect transfers, such as consumers paying extra for a cup of shade-grown coffee beans, he added.
According to the report hundreds of payment programmes for environmental services are currently being implemented around the world, mainly as part of forest conservation initiatives.
"But relatively few programmes for environmental services have targeted farmers and agricultural lands in developing countries," it adds. The agency notes that population growth, rapid economic development, increasing demand for bio-fuels and climate change are putting environmental resources under pressure throughout the world.
One of the important reasons for environmental degradation is the perception that many of nature's services are free "no one owns them or is rewarded for them and farmers have little incentive to protect them," states FAO.
Payments for environmental services represent one way of increasing incentives to adopt improved agricultural practices and even to offset pollution generated in other sectors.
FAO adds that while such measures can ensure that farmers consider the impact of their production decisions on the environment, they are not the best solution in all situations.