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Payments for Environmental Services (PES) schemes present a new approach that creates a conditional benefit transfer between upland providers of environmental services and the downstream beneficiaries of these services. Such schemes can take the advantage of upland-lowland interactions in generating environmental benefits while improving the livelihoods of upper-catchment agricultural households. The past few years have witnessed a surge of interest in the development of PES schemes in Asia. The Vietnamese Government expressed recently its interest in starting such a scheme to protect fragile upper-catchments whose degradations are causing problems, among others, on hydro-electric infrastructures. Northern provinces of Vietnam are characterized by biophysical, social, and cultural diversity. The region suffers from severe environmental problems such as deforestation, soil degradation, and loss of biodiversity. As a result, the livelihoods of agricultural households may be unsustainable. Moreover, they are also producing negative externalities for lower parts of the countries. However, households in upper catchments are heterogeneous because they have unequal access to natural resources. The upper-catchments are generally composed of a narrow bottom-valley, where irrigated rice fields are found, and of surrounding sloping land with upland rice, maize and cassava. The differential access to those compartments of the watershed has some important consequences in terms of household farming practices and livelihood strategies. The proposed paper is organized in two parts. The first part reports farm household surveys and proposes a typology of farmers living in two typical small watersheds. The second, through a simplified model of farms analyses how the poorest households would respond to such a PES scheme. Results of farm surveys showed that access to lowland paddies is uneven among agricultural households. Even in situations of apparent abundance of water, an important share of the villagers had little access to water during the months where it would be critically needed to cultivate a second rice crop. Therefore, watershed governance has far-reaching consequences that need to be recognized. We developed a recursive dynamic model shifting cultivators that integrated the dynamics of soil fertility over time and farmers decisions in order to analyse their potential participations in PES schemes. We simulated farmers without paddy land, and without access to markets. The model predicted that unless in-kind grain transfers are feasible, studied agricultural households are unlikely to participate voluntarily into a land retirement program. Overall, there is no easy solution to tackle both environmental and welfare issues of poorest potential suppliers of environmental services in the upper-catchments of Northern provinces of Vietnam, especially when they do not have access to markets.