"(Farming) has the potential to degrade the Earth's land, water, atmosphere and biological resources -- or to enhance them -- depending on the decisions made by the more than 2 billion people whose livelihoods depend directly on crops, livestock, fisheries or forests," said FAO Director-General Jacques Diouf.

"Ensuring appropriate incentives for these people is essential," he said in his foreword to the agency's annual report "The State of Food and Agriculture" which focused on environmental payments.

The FAO points out that many governments already subsidise farming, but rarely do so to protect the environment.

"Current incentives tend to favour the production of food, fibre, and increasingly, biofuels, but they typically undervalue other beneficial services that farmers can provide," it said.

The report concentrates on three particular "services": the storage of carbon dioxide in plants and soil which can help slow global warming; water provision from flood prevention and water filtration through roots and soil; and nature conservation.

One of the first such payment schemes was the Conservation Reserve Program, a 1985 programme to pay US farmers to retire crop land from farming for 10-15 years. The report says hundreds of schemes now exist in rich and poor countries, mostly in the forest management sector.

As deforestation is estimated to produce at least 18 percent of global greenhouse gas emissions, a potentially huge growth area would be in paying poorer countries not to chop down their forests.

That option is now allowed only to a limited extent by the Kyoto Protocol, but countries meeting in Indonesia in December to discuss global climate change initiatives for after 2012 will consider whether it should be expanded.

Environmental payments to farmers do not have to be linked to them stopping farming, but can be an incentive to make it less damaging, such as encouraging "shade-grown" coffee rather than intensive production where forest canopies are destroyed.

The report stresses the drawbacks as well as potential benefits of environmental payment schemes, for example the risk that they may reduce food output for hungry populations.