Clean Development Mechanism of the Kyoto Protocol has potential to reduce rural poverty through payments to farmers who provide carbon storage through land-use systems such as agroforestry. Agroforestry is recognized as a carbon sequestration strategy because of its applicability in agricultural lands as well as in reforestation programs which will benefit not only the landowners or farmers but the society at large. Globally agroforestry is practiced over one billion ha land area and has relatively high capacities for capturing and storing atmospheric CO2. According to IPCC, agroforestry has mitigation potential of 1.1–2.2 Pg carbon over the next 50 years. Further, 630 million ha of unproductive croplands and grasslands if converted to agroforestry could sequester 0.586 Tg C/yr by 2040. Carbon storage is an additional output that landowners might consider in their management decisions especially now when carbon payments are introduced. Agroforestry though now is receiving increasing attention but the potential of agroforestry as a strategy for carbon sequestration is still not fully recognized. This is due to lack of empirical evidence which could explain the potential of agroforestry systems on reducing atmospheric CO2. This lack of understanding warrants research that would address both biophysical and socioeconomic issues of carbon sequestration by agroforestry. Thus to realize its potential of C sequestration in both subsistence and commercial enterprises, innovative policies based on real field studies needs to be adopted. The paper reviews the carbon storage potential of agroforestry and discuses the ways to exploit it for the benefit of farmers and the society as a whole.