This paper: reviews the development to date of agri-environmental policy in Europe; provides a critical assessment of its achievements and shortcomings; explores its likely future trajectory in the context of continuing CAP reform; highlights potential conflicts that may result; and draws comparisons with policy approaches in Australia and the US. The paper argues that the first generation of agri-environmental measures, implemented by northern European states in the early 1980s, focused on pollution prevention and came mainly in the form of command-and-control regulation. Agrienvironmental programmes of the second generation, implemented during the 1990s, essentially pay farmers for the provision of environmental public goods in the countryside, recognising the wider role of agriculture in maintaining and enhancing the ‘cultural landscape’. The emphasis on ‘amenity’ contrasts policy approaches in Australia and in the US which focus on resource management and the control of nonpoint source pollution, respectively. The paper argues that, while agri-environmental payment schemes constitute ‘quasimarkets’ for public goods and thus correct for a pre-existing market failure, their environmental effectiveness is often undermined by informational deficiencies and asymmetries in the farmer-government relationship. These give rise to a set of problems including adverse selection, moral hazard and high transaction costs in the delivery of policy. The problems are compounded by the fact that schemes are often poorly targeted and pursue income support as a hidden objective. The paper invokes the concept of ‘joint production’ to analyse the output and trade implications of agrienvironmental schemes and concludes that not all schemes are trade-neutral, despite the fact that European agri-environmental payments enjoy the status of Green Box instruments in the GATT. It is argued, however, that carefully designed and targeted environmental schemes may be classified as ‘trade-correcting’. The paper concludes that the future of European agri-environmental policy will depend largely on the trajectory of the Common Agricultural Policy. If future trade talks force a significant restructuring of current support mechanisms, policy makers may face strong incentives to shift funds from Blue Box productivist support to Green Box environmental support, thereby injecting significant amounts of money into the conservation of the ‘European garden’. If, in contrast, the current support system remains intact, agri-environmental policy is more likely to adopt a cross compliance approach, making income support payments contingent upon the recipients’ compliance with pre-determined environmental standards.