Agri-environmental policy is at a crossroads. Over the past 20 years, a wide range of policies addressing the environmental implications of agricultural production have been implemented at the Federal level. Those policies have played an important role in reducing soil erosion, protecting and restoring wetlands, and creating wildlife habitat. However, emerging agri-environmental issues, evolution of farm income support policies, and limits imposed by trade agreements may point toward a rethinking of agri-environmental policy. This report identifies the types of policy tools available and the design features that have improved the effectiveness of current programs. It provides an indepth analysis of one policy tool that may be an important component of a future policy package-agri-environmental payments. The analysis focuses on issues and tradeoffs that policymakers would face in designing a program of agri-environmental payments.