The study explored the use of the FALLOW model for assessing the impact of land use policies related to Designated Land Use to farmers' welfare and landscape carbon stocks in the Upper Konto catchment, East Java, Indonesia. A livestock (dairy cattle) module was added to FALLOW version 2.0 to enable simulating livelihood options in the area and four scenarios were explored: (0) baseline condition of protecting designated forest area, (1) full access to land, (2) conserving forest reserve only and (3) giving limited access to plant tree-based systems in part of state forest land. The study revealed that the current land use policy could lead to reduction in farmers' welfare (US$.capita-1.year-1) and average aboveground carbon stocks (Mg.ha-1). A change in land use policy by giving limited access to manage tree based systems in part of the State Forest Land could maintain the aboveground landscape carbon stocks level and reduced the decline of farmer's welfare. The result showed the efficacy of integrating economic, biophysical and farmers' learning dynamics in a simulation model such as FALLOW to explore various policy scenarios for natural resource management. FALLOW enables to prospect potential landscape trajectories and its consequences on landscape level indicators such as welfare and carbon stocks, for further discussion with local stakeholders. The results of model performance evaluation based on spatial accuracy and area inaccuracy revealed the need to refine the current new land allocation module.