The present paper reviews the development of agri-environmental policy in Europe and assesses its prospects. While it does so from a predominantly UK perspective, there are many common features of the experience and policy choices across the majority of Member States. The first generation of agri-environmental measures applied command-and-control regulation for the prevention of pollution. Second-generation measures pay farmers for providing environmental public goods. The emphasis on ‘amenity’ derived from the maintenance of agricultural production systems contrasts with policy approaches in Australia and the USA. Well-designed incentive schemes constitute ‘quasi-markets’ for public goods, correcting for a pre-existing market failure. Problems in the delivery of policy include poor spatial targeting and a lack of clarity between environmental and income support objectives. Various changes will be required in order to increase the environmental effectiveness and efficiency of agri-environmental mechanisms.