Australia's prime minister, Kevin Rudd, and his PNG counterpart, Sir Michael Somare, have signed off on the partnership at a meeting in Port Moresby.
Nearly two thirds of Papua New Guinea's land area is forested and it is one of four remanning significant tropical rain forests in the world.
Mr Rudd says PNG can play a major part in reducing emissions from deforestation.
"And that is how any decision by Papua New Guinea in this connection could be enhanced and served by a global carbon market, regional carbon markets or national carbon markets," he said.
Meanwhile, Mr Rudd says he is confident Australia and Papua New Guinea can reach an agreement on how best to protect the Kokoda Track from a proposed copper mine.
Mr Rudd and Sir Michael have held talks on the issue.
Mr Rudd says a process is in place that will ensure the interests of both countries are respected.
"We are confident that our officials will arrive at a good outcome on this, which deals with the challenges of land use, deals with the challenges of the needs of local villagers and the local community," he said.
"[It] deals also with the historical significance which this track has for many people in my country".
The Kokoda track runs for nearly 100 kilometres through the Owen Stanley Mountain Range in Papua New Guinea.
It is renowned as the location of the World War II battle between Japanese and Australian forces in 1942.