There is an increasing demand for information about the economic impact of agricultural carbon (C) sequestration in the developing world, but as yet no studies have assessed the potential for farmers in the highland tropics to participate in C contracts. In this paper we show how an econometric-process simulation model, designed to simulate the value of terrace and agroforestry investments, can be used to assess the economic feasibility of C sequestration. We use this model to simulate the impact of C contracts on the adoption of terraces and agroforestry practices in the highlands of northern Peru. The analysis shows that participation in C contracts could increase adoption of terraces and agroforestry practices, with the rate of adoption depending on the C accumulation rate and key factors affecting terrace productivity such as field slope. The simulation results show there is a relatively low economic potential for C sequestration in this agricultural system at C prices below $50 per MgC, but that potential increases substantially for C prices above $50 per MgC. Under favorable conditions for C sequestration and a C price of $100 per MgC, terrace and agroforesty adoption and C sequestration have the potential to raise per capita incomes by up to 15% on farms with steeply sloped fields, and reduce poverty by as much as 9%.