The development of a forestry carbon sink project is an important way to achieve carbon neutrality and carbon reduction, and the collective forest carbon sink project is an important part of China’s forestry carbon sink project. As the main management entity of collective forests, whether farmers are willing to produce forestry carbon sinks is directly related to the implementation effect of the project. In this paper, a partial equilibrium model of farmers’ forestry production behavior was established based on production function and utility function, and the path to enhance farmers’ willingness to produce forestry carbon sink through forestry carbon sink projects was analyzed in combination with forest ecological management theory. In terms of empirical analysis, the PSM-DID econometric model was established based on the survey data of LY in Zhejiang Province, China, and the following conclusions were drawn: (1) With the receipt of revenues from forestry carbon sequestration projects and partial cost-sharing by the government, farmers’ participation in forestry carbon sink projects can save investment in forest land management. (2) The saved forestry production costs and forestry carbon sink project subsidies can make up for the loss of farmers’ timber income, so that the net income of forestry will not be significantly reduced. (3) The forestry production factors saved by farmers can be transferred to non-agricultural sectors and increase non-agricultural net income, so that the net income of rural households participating in forestry carbon sink projects will increase. The forestry carbon sink project can improve the utility level of farmers and increase the willingness of farmers to produce forestry carbon sinks by delivering income to farmers and saving forestry production factors. This study demonstrates that a well-designed forestry carbon sink compensation mechanism, combined with an optimized allocation of production factors, can effectively enhance farmers’ willingness to participate. This insight is also applicable to countries or regions that rely on small-scale forestry operations.