Carbon Trading in Nepal

An overview in policy, legal and institutional framework for Carbon Trading in Nepal.

1. Concept of Carbon Trading

Carbon trading is an international market mechanism designed to reduce greenhouse gas emissions. It involves the buying and selling of carbon credits, where one carbon credit represents the reduction or removal of one metric ton of carbon dioxide (CO₂) or its equivalent. Countries or organizations that exceed their emissions targets can purchase credits from those that have surplus reductions. In essence, carbon trading monetizes environmental services, particularly the ability of forests and other ecosystems to sequester carbon. Countries like Nepal, with rich forest resources, can earn revenue by conserving or expanding forest cover and reducing carbon emissions.

2. Origin of Carbon Trading

The concept of carbon trading was formalized in 1997 during the Kyoto Protocol at the Third Conference of the Parties (COP3). This agreement requires industrialized countries to reduce their greenhouse gas emissions by an average of 5.2% between 2008 and 2012. Article 12 enables developed countries to invest in emission-reduction projects in developing countries and receive Certified Emission Reductions (CERs). The Clean Development Mechanism (CDM) allowed developed countries to invest in emission-reducing projects in developing countries and earn CERs, effectively creating a global carbon market.

The Paris Treaty (Paris Convention on Climate Change, 2015) is a legally binding international treaty under the UNFCCC, with non-binding emissions targets (relying on voluntary commitments, NDCs). Article 2 states the main objective to limit global temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C. Article 6 enables cost-effective mitigation by allowing countries to purchase emission reduction credits generated abroad. For seller countries like Nepal, participating in Article 6 offers access to finance and/or technology, enabling mitigation projects that might otherwise be unfeasible.

3. National Legal Framework

3.1. Environment Protection Act (2019), For the first time, explicitly authorizes the Government of Nepal to engage in carbon trading (Section 28), empowering Nepal to trade carbon credits with foreign governments, international organizations and private sector actors as prescribed by rules, with benefit-sharing arrangements.

3.2. Environment Protection Rules (2020), Authorizes sale of carbon stock from sustainably managed forests on national or international carbon markets. Permits trading of reduced emissions from other activities via the government, eligible associations, or private sector. Establishes a Technical Committee to evaluate submitted concept notes (PINs) and Project Design Documents (PDDs). Creates a Steering Committee to review and guide PDD submissions. Designates the Ministry of Forests and Environment (MoFE) as the Designated National Authority (DNA) for overseeing carbon trading.

4. Status of Implementation

Nepal signed the Emission Reductions Payment Agreement (ERPA) with the World Bank's Forest Carbon Partnership Facility (FCPF) in 2021. The program covers ~1.7 million hectares across 13 Terai districts, aims to reduce ~9 million tons of CO₂ by 2025 and up to ~34 million tons by 2028. Nepal earns ~$5 per ton of emission reduction, with ~23% held as buffer for fires and reversals. At least 80% of proceeds must go to local and indigenous communities as per benefit-sharing rules.

5. Current Revenue Generated by Nepal from Carbon Trading

Nepal has received Rs 1.6 billion for the first time through carbon trading. Nepal received this amount in the first installment for reducing 2.4 million tons of carbon emissions from 2018 to 2024 from 1.7 million hectares of forests in 13 districts of the Terai region from Rautahat to Kanchanpur. The amount received is US$5 per ton based on an agreement with the World Bank's FCPF program. Nepal's contribution to the world's total carbon dioxide emissions is only 0.048 percent. According to Nepal's long-term strategy, the goal is to reduce carbon emissions to zero by 2045.

6. Institutional Framework

• Ministry of Forests and Environment (MoFE): Apex ministry for climate change policy, forestry, and carbon trading. • REDD Implementation Centre: Coordinates and monitors Nepal's REDD+ Strategy and carbon trading activities. • Forest Research and Training Centre (FRTC): Technical expertise in forest carbon measurement (MRV studies). • Department of Forests and Soil Conservation (DoFSC): National forest management and community forestry oversight. • Alternative Energy Promotion Centre (AEPC): Emission reduction projects (biogas, improved cookstoves). • Provincial and Local Governments: Implementation and benefit-sharing at local level.

7. Procedure for Carbon Trading in Nepal (REDD+ Focus)

Program Design → Baseline Establishment → Implementation → Measurement, Reporting, and Verification (MRV) → Credit Issuance → Trading & Payment under ERPA agreements.

8. Conclusion

Carbon trading presents a significant opportunity for Nepal to leverage its vast forest resources for climate finance and sustainable development. With active agreements like those with the World Bank and the LEAF Coalition, Nepal is poised to earn substantial revenue (potentially exceeding Rs. 75 billion) by 2026, rewarding efforts in forest conservation and sustainable management. These funds are crucial for achieving NDC targets, including net-zero emissions by 2045 and carbon negativity thereafter.

Why with us?

We act as bridge between government regulators, communities, and investors to ensure equitable, legally sound outcomes. We help stakeholders in project development and compliance, regulatory approvals, documentation and contracts, drafting sovereign ERPA terms and advising on legal frameworks for data collection/management. Please contact us to discuss how we can support your carbon trading goals.

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