This paper evaluates policies for addressing forest degradation in developing country hill areas, where agriculture is the major activity and villagers depend on forests for important economic inputs. Population growth, poverty, and open access probably explain most 'overuse' in such areas, but these are very difficult, long-term problems. The paper argues that under such conditions interim demand-side policies should be seriously considered, but the case is also made that the set of feasible instruments is quite small. Focusing on the case of Nepal, two instruments for reducing fuelwood demand – promotion of more efficient, wood-burning cookstoves and policies that reduce the prices of alternative fuels (e.g., through subsidies) – are evaluated. Using a simple analytical model and results from two household surveys conducted in Nepal, it is concluded that promoting improved stoves is a much more efficient and equitable instrument than, for example, subsidizing the major alternative fuel, which is kerosene. The cost of fuelwood saved using improved stoves is predicted to be a very low $2.77 per metric ton.