This paper focuses on whether the provision of landless forest-adjacent communities with options to grow appropriate food crops inside forest reserves during early stages of reforestation programmes enable vertical transition of low income households and conserves forests. We consider the welfare and environmental impact of a unique incentive scheme known as the Plantation Establishment and Livelihood Improvement Scheme (PELIS) in Kenya. PELIS was aimed at deepening community participation in forestry, and improving the economic livelihoods of adjacent communities. Using data collected from 22 Community Forest Associations and 406 households, we evaluated the mean impact of the scheme on forest cover and household welfare using matching methods and further assessed the heterogeneous impact of the scheme on household welfare using the endogenous quantile treatment effects model. The study revealed that on average, PELIS had a significant and positive impact on overall household welfare (estimated between 15.09% and 28.14%) and on the environment (between 5.53% and 7.94%). However, in terms of welfare, the scheme cannot be defended on equity grounds as it has inequitable distributional impacts on household welfare. The scheme raises welfare of the least poor than the poorest and marginalizes sections of the community through elite capture and lack of market linkages.