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The Brazilian Forest Code (FC) requires all private rural properties to maintain a fixed proportion of their area in natural vegetation as a “legal reserve” whose proportions are differentiated by biome. Landowners have often ignored the law. Regaining full compliance would require costly restoration in areas converted. Recent changes to the FC provide that landowners may “compensate” their legal reserve shortages by purchasing surplus compliance obligations from other properties. This paper discusses critical policy issues regarding Environmental Reserve Quotas or Cotas de Reserva Ambiental (CRA). We examine the relative environmental effectiveness of the CRA, its efficiency in resource use and social justice, as well as potential implementation hurdles. Allowing for compensation with off-site conservation can enable both more efficient, and less fragmented agricultural production, as well as forest conservation, compared to the default on-farm conservation proposition. CRA as a means for compensation has great intuitive appeal, yet controversy exists regarding its implementation. We review international experience with similar economic instruments, as well as Brazilian studies simulating the potential results of the CRA. Interviews with leading actors regarding the instrument complement the literature review. We finish with a synthetic assessment of the implications of our results for policy implementation.