Mechanisms to reduce carbon emissions from deforestation and forest degradation (REDD) have been gaining momentum as a way to combat global warming, fund forest conservation, and deliver economic benefits to rural populations. However, the economic viability of REDD schemes will depend on the profitability of alternative land uses. Oil palm agriculture has become a major driver of tropical deforestation over the last few decades. Here, we model and compare the profitability of converting forest to oil palm versus conserving it for an REDD project. We show that converting a hectare of forest for palm oil production will be more profitable (yielding net present values of $3,835–$9,630) to land owners than preserving it for carbon credits ($614–$994), which are currently restricted to voluntary carbon markets. Giving REDD credits price parity with carbon credits traded in compliance markets would boost the profitability of avoided deforestation (up to $6,605). Unless post-2012 global climate policies legitimize the trading of carbon credits from avoided deforestation, REDD will not be able to compete with oil palm agriculture or other similarly profitable human activities as an economically attractive land-use option, in which case REDD will not be able to fulfill its primary function of avoiding deforestation.