This paper explores the inter-sectoral and land-use dynamics behind the development of bio-energy as a climate change policy through a computable general equilibrium (CGE) with a land use change (LUC) model. It assesses the economic and social costs of bio-energy development both in terms of the financial investment needed for its market penetration and in terms of the trade-offs its future supply will entail upon the land-use system. It analyzes how policies directed to develop bio-energy alters the pattern of energy mix and land utilization in the economy and how these changes in turn contribute to carbon dioxide (CO2) mitigation. Policies analyzed in the study include carbon tax with revenues recycled upon bio-energy subsidy and upon direct tax reductions. It presents as well the implications of extending the scope of carbon taxation to emissions from energy use and from land-use changes.