Growing trees with crops has environmental and economic implications. Trees can help prevent land degradation and increase biodiversity while at the same time allow for the continued use of the land to produce agricultural crops. In fact, growing trees alongside crops is known to improve both the productivity and sustainability of the land. However, due to high labour-input requirements, high costs of establishment, and delayed revenue returns, trees are often not economically attractive to landholders. Because of the Kyoto Protocol, and the growing emphasis on market-based solutions to environmental problems, the ability of trees to sequester and store CO2 has altered the economic landscape of agroforestry systems. The economic and management implications of carbon-sequestration payments on agroforestry systems are addressed in this study using a bioeconomic modelling approach. An agroforestry system in Indonesia is simulated using a biophysical process model. A general economic analysis of this system, from the standpoint of individual landholders, is then developed and the implications for management and policy are discussed.