Nepal Carbon Economy Presentation

Nepal earned NPR 4.75 billion from eight carbon trading projects in October 2024. In the budget for FY 2082/83 (2025/26), the Finance Minister announced continued implementation of emission reduction programmes to sustain carbon trading. Through its laws and legislative framework, the government alongside the private sector aims to facilitate the sale of reduced emissions and verify carbon savings in national and international markets via sustainable forest management. Will Nepal unlock its full potential in the global carbon market?

Prepared as a World Environment Day special. Position as at June 2025.

What is carbon credit trading?

• Carbon credit trading allows countries, industries and companies to buy and sell permits for carbon dioxide emissions.
• One credit represents the removal or reduction of one metric ton of CO₂.
• It incentivizes emission reductions by creating a financial value for greenhouse gas reductions.
• There are two main markets: compliance markets (regulated by law) and voluntary markets (driven by sustainability goals).
• Carbon credits may be obtained through carbon sequestration and emission avoidance. Carbon sequestration projects are designed to capture and store carbon dioxide (CO₂), whereas emission avoidance projects seek to prevent the release of CO₂ emissions altogether.
• Such credits can be generated through a variety of activities, including but not limited to reforestation, afforestation, enhanced forest management, and the implementation of sustainable agricultural practices.

Most relevant instruments

1. Kyoto Protocol (1997): an international agreement with 192 signatories to reduce greenhouse gas emissions through carbon credits, operationalizing the UN Framework Convention on Climate Change.
2. Paris Agreement (2015): signed by 196 parties to limit global temperature rise to below 2°C and promote emissions trading and national climate action.
3. Glasgow Climate Pact (2021): resulting from COP26, it urges nations to fund forest conservation and green energy, enabling carbon credit use to meet emission goals.
4. U.S. carbon credit initiatives: starting with the 1990 Clean Air Act, the U.S. has led cap-and-trade efforts via programmes like RGGI, California’s system (2013), and the 2022 Inflation Reduction Act to reduce CO₂ emissions.

Legal framework in Nepal

• Section 28, Environment Protection Act, 2019 empowers the Government of Nepal (GoN) to engage in carbon trading.
• Rule 28, Environment Protection Regulations, 2020 (EPR) allows the GoN to (i) sell carbon stock obtained from the sustainable management of forests in national or international markets, and (ii) sell reduced carbon emissions from other activities through the GoN, an association, or the private sector. The rule further enables the GoN, or other entities, to trade in carbon reduced through the Clean Development Mechanism (CDM).
• Rule 29 of the EPR establishes a Technical Committee responsible for evaluating the concept paper and Project Design Document (PDD).
• Rule 30 of the EPR establishes a Steering Committee to provide recommendations on the PDD.
• Implementing institutions: the REDD Implementation Centre (IC) through a World Bank-supported programme, and the Alternative Energy Promotion Centre (AEPC) through CDM, Programme of Activities (PoA) and Green Climate Fund (GCF) projects.
• Rules 29 and 30 of the EPR provide for representation from both the REDD IC and AEPC in the permanent Technical and Steering Committees.
• Rule 31 designates the Ministry of Forests and Environment (MoFE) to function as the Designated National Authority (DNA), with specified roles, rights and duties.

Achievements so far

Carbon law is changing

After four years of the EPR (2020), the Ministry of Forests and Environment (MoFE) proposed the first amendment to the prevailing Environment Protection Rules on 16 August 2024, focusing on impact assessment (IA) processes and carbon trade. The key proposed amendments are set out below.

Way forward

• Soaring market demand: global demand for carbon credits is projected to grow exponentially from about US$ 1 billion annually in the current voluntary market to US$ 100 billion by 2030, driven by both compliance and voluntary mechanisms.
• Multiple demand drivers: four key sources are fuelling demand, namely (1) corporate compliance with carbon tax laws, (2) national efforts to meet Nationally Determined Contributions (NDCs), (3) voluntary net-zero commitments by companies, and (4) international aviation obligations under CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation).
• Strategic leadership essential: officials leading Article 6 of the Paris Agreement implementation in Nepal should hold four to five-year terms aligned with UNFCCC (United Nations Framework Convention on Climate Change) processes and MRV (Measurement, Reporting and Verification) cycles. With decisive leadership and swift reforms, Nepal can gain an early-mover edge, particularly in high-demand compliance markets, by meeting the criteria for trading correspondingly adjusted credits.
• Nepal’s legal shift: Nepal is amending its Environment Protection Regulation to enable Article 6 participation, marking its first legal step toward engaging in carbon credit trading under the Paris Agreement.
• Institutional readiness and reform: Nepal must build a robust MRV system, establish a national registry, and secure the capacity to submit biennial transparency reports, to avoid overselling and ensure high-integrity transactions in carbon markets.
• Act now: failure to act swiftly risks Nepal missing vital climate finance needed for energy transition, forest conservation and development. Other countries are advancing fast, and without institutional and regulatory reforms, Nepal could fall behind and lose revenue opportunities.

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