Paying developing countries for carbon sequestration is seen as a vital component of climate change mitigation. If appropriately designed, these payments can also transfer income to poor villagers, which can aid both the long-term sustainability of the carbon sequestered, as well as meeting the goal of poverty reduction. However, to encourage the participation of small-scale producers, a CDM forest project must offer sufficient incentives with minimal costs to participants. Both incentives and costs are embedded in property rights, social capital and contractual rules. In this paper, we ask what factors affect participation in the world’s first CDM project, established in Guangxi Province, China. Using village-level surveys, we found that: [1] carbon pooling arrangements and the share-holding system are important innovations made by the Guangxi carbon project in its attempt to reduce transaction costs and increase the accessibility of the project to the poor and small-scale local land users, and; [2] the provincial and local governments, as well as local forest companies, are critical intermediaries, facilitating the project. Despite the institutional innovations, a significant portion of the project land remains unforested. We found that the primary reasons are: constrained contractual rules, disputes in property rights allocation and low levels of social capital in some villages. We conclude with the following policy suggestions: [1] design contractual rules that are acceptable to local land users in order for them to participate in and benefit from CDM forest projects;[2] use viable means to build up trust among forest carbon sequestration service providers. [3] consider the social capital in the local area at the design stage.