Rural livelihood in arid irrigated areas is hampered by water scarcity, land degradation and climate change. Studies showed a possibility to tackle these challenges by establishing tree plantations on marginal croplands as supported by the Clean Development Mechanism (CDM) forestation programs. Despite the environmental impact such projects would also affect the decision making of rural population by changing their land use activities, incomes and consumption structures. Thus, this study further analyzed the impact of CDM forestation on rural livelihood by considering rural interdependencies via wage-labor relations of agribusiness-operated farms and rural households in the Khorezm province and southern districts of Autonomous Republic of Karakalpakstan, Uzbekistan. We developed a farm-household dynamic programming model that jointly maximizes farm profits and rural households net incomes over a 15-years horizon under the scenario of decreasing irrigation water availability and plantation forestry with a seven year rotation period. The analysis showed that shortly following a land use change towards afforestation, the farm demand for rural households’ labor would decline thus decreasing the household incomes. Yet, later on after harvesting tree plantations, in year seven, the farm benefits would be transmitted to rural households via access to cheaper fuelwood and leaves as fodder, as well as via improved land use activities. The availability of fuelwood from tree plantations would significantly decrease CO2 emissions of households by substituting fossil fuels, while leaves would reduce expenditures for livestock fodder. These substitution effects would lead to the increase of income and in turn improve households’ food consumption. Besides, given the low irrigation demand of trees, a conversion of marginal cropland to tree plantations would increase the irrigation water availability for other productive croplands. These changes would lead that tree plantations would increase in year seven profits of farmer (up to 39,200 USD) and net incomes of rural households (up to 12,700 USD). Whereas when only conventional land uses are followed the decline in water availability would reduce profits of farm (from 13,000 USD to 9,850 USD) and net incomes of rural households (from 11,900 to 10,500 USD) over the modeled period. Overall, we argue that the implementation of the short-term CDM forestation could help cushion repercussions of water shortages on rural livelihoods, sustaining energy, income and food security, as well as mitigating climate change in drylands.