Costa Rica's turnaround is among the most documented in tropical conservation. What's less discussed is that the mechanism enabling it is now facing structural pressure from the same policy directions sustainability leaders are being asked to accelerate.
How the 1996 Forestry Law Created a Market for Ecosystem Services
Costa Rica's Forest Law No. 7575, passed in 1996, created a national Payment for Ecosystem Services (PES) program administered by FONAFIFO, the Fondo Nacional de Financiamiento Forestal (National Forest Financing Fund). Rather than subsidizing land clearing, the law compensated private landowners directly for four defined services: carbon sequestration, biodiversity protection, water regulation, and landscape. Contracts run five to ten years. Funding comes primarily from a 3.5% allocation of national fuel tax revenues and 25% of water concession fees.
Over the program's history, more than 18,000 families have participated, covering more than 1.3 million hectares under active contracts, with cumulative investment exceeding $524 million. In December 2020, Costa Rica signed an Emission Reductions Payment Agreement with the World Bank's Forest Carbon Partnership Facility for up to $60 million in exchange for reducing 12 million metric tons of carbon emissions by 2025. The country received a first payment of $16.4 million in 2022 and a second of $17.5 million in early 2025, and became the first country to sell excess verified credits to a LEAF Coalition buyer.
What Researchers Say About the Program's Actual Additionality
Evaluations of how much the payment program itself — rather than the broader policy environment — deserves credit for Costa Rica's recovery have produced a more qualified picture. A November 2025 analysis by Hernández-Blanco and Costanza in Ecosystem Services notes that because deforestation is already prohibited under the Forest Law, the incremental impact of financial payments is difficult to isolate from other factors: removal of agricultural subsidies, declining cattle profitability in the 1990s, and ecotourism growth that created direct economic value in standing forests. Most researchers characterize the PES program as an important contributor within a much broader transition. From 2002 through 2024, Costa Rica lost only about 31,100 hectares of primary forest — a 2% decline over two decades.
The Funding Model That Enabled Recovery Now Faces Its Own Risk
The fuel tax financing the PES program is the same revenue source being eroded by transportation electrification. As Costa Rica expands its electric vehicle fleet, fuel tax receipts are narrowing, and the conservation contracts funded by them are at risk. The Hernández-Blanco and Costanza paper proposes a "Natural Capital Trust of Costa Rica" — a PES 2.0 model with diversified revenue streams, reduced dependence on any single source, and expanded scope across ecosystem service categories. Climate projections in Costa Rica's own REDD+ planning documents add further urgency: rainfall is expected to decline by up to 32% by 2050, with longer dry seasons and more frequent wildfires already stressing recovering forests.
What the Model Demonstrates for Sustainability Leaders
Costa Rica's experience, which has since shaped ecosystem payment programs in Mexico, Vietnam, and elsewhere, illustrates what happens when environmental protection is treated as an economic design problem rather than a compliance obligation. The current challenge of replacing fuel-tax revenue with more durable financing is a test of that same principle: whether the financial architecture that enabled recovery can be redesigned to survive the energy transition it helped make possible.
