This paper identifies and examines economic response options to avoid carbon emissions and increase carbon sequestration in Mexican forests. A ''Policy'' scenario covering the years 2000, 2010 and 2030 and a ''Technical Potential'' scenario (year 2030) are developed to examine the potential carbon sequestration and costs of each response option. Benefit-cost analyses for three case studies, including management of a pulpwood plantation, a native temperate forest and a native tropical evergreen forest are presented and discussed. The study suggests that a large potential for reducing carbon emissions and increasing carbon sequestration exists in Mexican forests. However, the achievement of this potential will require important reforms to the current institutional setting of the forest sector. The management of native temperate and tropical forests offers the most promising alternatives for carbon sequestration. The cost effectiveness of commercial plantations critically depends on very high site productivity. Restoration of degraded forest lands; particularly through the establishment of energy plantations, also shows a large carbon sequestration potential.