An ongoing PhD project investigates the potential of Payments for Environmental Services (PES), one of the latest market based mechanisms for conservation of ecosystem services, to secure not only ecosystem or environmental services, but also the livelihoods of small scale farmers in Central America. This is done in the context of small holder coffee agroforestry systems in Costa Rica and Nicaragua, where vulnerability to coffee price fluctuations and uncertainties in the production are driving farmers towards more intensive cropping systems that do not provide nearly the same level of ecosystem services as shade coffee. The dismantling of the International Coffee Agreement in 1989 and price stabilization schemes (Costa Rica) left coffee farmers exposed to world price variability after a long period of relatively stable prices. This has had a profound impact on the vulnerability of coffee farmers’ livelihoods and the ecological important shade coffee systems, as was witnessed during the coffee crisis in 2001/02. In both Nicaragua and Costa Rica certification schemes ensuring a minimum price or a price premium are widely adopted, but ‘true’ PES schemes involving direct payments based on provision of a certain environmental service from coffee agroforests are still in its infantry. PES schemes targeted at agroforestry systems, a label that also fits shade coffee systems, have been in work since 2003 in Costa Rica. In Nicaragua PES is being introduced in cocoa production systems that are similar to coffee systems in various ways. Furthermore, PES is being widely implemented in silvopastoral systems across the region. The organisation of coffee farmers in cooperatives dispersed throughout the coffee producing areas have a potential positive role in the facilitation of a PES scheme targeting small holder coffee farmers. By drawing on PES experiences from other regions and sectors, and through an investigation of the livelihood strategies of coffee farmers and the role of cooperatives, the PhD project aims to formulate recommendations for the design of PES schemes that in an effective, efficient and equitable manner can sustain environmental services and improve livelihoods in the small holder coffee sector. The project is carried out in the collaborative auspices of CATIE in Costa Rica and University of Copenhagen, Denmark.