We present a method for measuring the opportunity cost of sequestering carbon on tropical farms. We derive the rates of carbon sequestration for timber and agroforestry systems and compute incentive compatible compensating payment schedules for farmers who sequester carbon. The method is applied to data for an agricultural watershed in the Philippines. Area- and land quality-adjusted total costs are estimated. The present value of the opportunity cost of carbon storage via land modification falls between $3.30 and $62.50 per ton. Carbon storage through agroforestry is found to be less costly than via a pure tree-based system.