Forest resources can provide benefits according to their capacity if there is an efficient resources allocation. Efficient allocation requires an assessment of value of benefits for the entire economy, not just financial benefits for business entities. Currently, degraded natural peat swamp forests within production forest areas are faced with the choice of being managed as natural forests, plantations forests or converted into plantations. Financial benefits are seen as more tangible and prominent benefits than economic benefits in policy formulation. This study aims to apply appropriate economic analysis methods to formulate policies for allocating forest resources efficiently. A comprehensive cost benefit analysis framework by internalizing environmental costs is used to formulate management policy of degraded natural peat swamp forest. This research is a case study in Sungai Merang-Sungai Ngirawan Peat Hydrological Unit (PHU). The results indicate that secondary peat swamp forests are more appropriately managed as secondary natural production forests rather than if it is managed as industrial plantations or converted to plantations. The use of a science framework in the practice of policy formulation is expected to support the sustainable forest development, especially in relation to climate change.