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This paper develops an econometric model to estimate the economic determinants of forest land conversion in Esmeraldas, Ecuador and evaluates the effect that transaction costs have on incentive-based climate change mitigation activities. Using a logistic share model, the results show a high extent of competition for the use of land between agricultural production for palm oil processing and land-based carbon mitigation through avoided emissions from deforestation. Our results show that the current policy of introducing conservation payments in Ecuador is not sufficient to significantly reduce deforestation, but that payment levels based on a plausible international carbon price would make an appreciable difference in the net sequestration contribution of forests in northern Ecuador. Knowledge generated from this research can inform site-specific land use policy design aimed at addressing the opportunity costs of tropical forest conservation as an important component of climate mitigation strategies.