Editors' Summary: The controversial Kyoto Protocol, negotiated in December 1997, is the first major step toward implementation of the Framework Convention on Climate Change. The Protocol sets targets for the reduction of greenhouse gas emissions by industrialized countries. This Dialogue focuses on the provisions of the Protocol that are concerned with carbon absorption by terrestrial ecosystems. It also examines the provisions' potential for creating effective and sustainable management of forests and associated biodiversity. The authors note that certain legal and financial issues must be resolved for that potential to come to fruition. This Dialogue reviews those legal and financial issues in order to provide a clear picture of what actually will be required for the Protocol to support effective forest management and biodiversity. The authors conclude that the Protocol's forest provisions, as written, may not be fully effective. Furthermore, although the Protocol creates opportunities to support proper forest management and biodiversity conservation, the overall climate change objectives of the Protocol could face significant risks and hindrances from "positive externalities" such as carbon sequestration projects. Those risks, however, can be minimized by research and information systems development and through the introduction of financial instruments that reduce the risks and transaction costs faced by investors.