Carbon markets are systems where businesses or countries can buy and sell permits to emit carbon, helping balance global emissions. While Nepal contributes a minuscule 0.04% to global carbon emissions, the country finds itself at a key crossroads to benefit from the expanding global carbon trade. With rising international demand for carbon offsetting, Nepal's forests and low-emission status present a valuable asset; however, translating this potential into economic gains remains a challenge.
According to the Third National Communication, Nepal's total carbon emissions stood at 28,166 Gg of CO₂-eq in 2011 which is extremely low compared to industrialized nations. In 2022, Nepal emitted only 0.53 tons of CO₂ per capita, compared to the global average of 4.8 tons, despite holding 0.37% of the world's population. Countries like Palau (76.41 tons), Qatar (35.48 tons), and Bahrain (24.75 tons) top the per capita emissions list, while the top five emitters in total are China (34%), the U.S. (13%), India (7%), Russia (5%), and Japan (3%).
Nepal's 44% forest cover is a carbon sink powerhouse. One hectare can absorb around 176.95 tons of carbon, with forests across the country collectively storing over 1.10 billion tons. The government targets 3.6 million tons of carbon sequestration, offering significant potential revenue through carbon trade, with current carbon offset prices averaging $42 per ton.
Progress and Achievements: Nepal's Steps into Carbon Trading
a. REDD+ and Forest Carbon Initiatives
Nepal has engaged with REDD+ since 2008, launching a REDD Readiness Phase (2008–2015) with support from the World Bank, NORAD, and USAID. The National REDD+ Strategy (2018) emphasizes inclusion, equity, and governance.
b. USD 45 Million Deal with the World Bank
In 2021, Nepal signed a results-based agreement with the World Bank's Forest Carbon Partnership Facility (FCPF), potentially earning up to USD 45 million (with a rate of USD 5 per ton) by 2025 for reducing 9 million tons of CO₂ through forest protection and sustainable management. In November 2024, Nepal has received NRs 1.6 billion (USD 12.2 million) as part of this program.
c. Strengthening MRV and Institutional Frameworks
Nepal has developed Measurement, Reporting, and Verification (MRV) systems, including a Forest Reference Emission Level (FREL), satellite-based monitoring, and a national forest inventory. The REDD+ Implementation Center plays a central coordinating role.
d. Capacity Building and Pilot Projects
Community Forest User Groups (CFUGs) have piloted REDD+ projects in districts like Gorkha, Chitwan, and Dolakha, blending indigenous knowledge with modern carbon accounting. These pilots have tested benefit-sharing mechanisms and built grassroots capacity.
e. International Recognition
Nepal's community forestry model, over 22,000 CFUGs managing 2 million+ hectares, has earned global recognition. Nepal has shared its success at UNFCCC COPs, becoming a prominent voice for inclusive forest governance.
Nepal's carbon trade journey has started in the forestry sector, marked by international partnerships, community-based conservation, and structured REDD+ implementation. The USD 45 million deal with the World Bank is a major milestone, paving the way for expanding carbon finance into other sectors such as energy, industry, agriculture, and waste.
The Alternative Energy Promotion Centre (AEPC) has facilitated carbon trade in the energy sector. Since 2011, Nepal has secured Rs. 4.83 billion from carbon trading linked to renewable energy projects like mini and micro hydropower, solar and wind plants, improved cooking stoves, biogas, and photovoltaic pumping systems, reducing over 6 million tons of carbon emissions. In a recent development, the Independent Power Producers' Association Nepal (IPPAN) signed an MoU with ProClime (January 2025) to involve 2,000 MW of hydropower in carbon trading.
With enhanced capacity, legal clarity, and multi-sectoral engagement, Nepal can further harness carbon trade as a key tool for climate resilience and sustainable development.
Climate Policies and Commitments
Nepal's policy environment is gradually aligning with the global emphasis on climate finance and carbon trading. The country's Second Nationally Determined Contribution (NDC) outlines ambitious targets for emission reductions across sectors, with forest-based carbon removals as a central strategy.
Key legal frameworks like the Climate Change Policy 2019 and the Environment Protection Act 2019 reinforce this direction by introducing carbon pricing and recognizing carbon rights. Nepal is also exploring advanced mechanisms like carbon taxes and domestic carbon markets, aiming to expand carbon trading beyond the forestry sectors.
Challenges Still Ahead
Despite its potential, Nepal faces several challenges in capitalizing on carbon trading, many of which stem from institutional and structural limitations. One of the foremost hurdles is the limited institutional capacity, as effective participation in carbon markets requires robust MRV systems, which are still under development. Alongside this, the country lacks a comprehensive policy and legal framework to clearly define carbon ownership rights and benefit-sharing mechanisms, and facilitate coordination among federal, provincial, and local levels of government.
Gaining market access, particularly to voluntary and compliance-based carbon markets, is also a significant challenge, as it demands high-level technical documentation, verification processes, and market literacy that Nepal is still building. Additionally, a lack of awareness and expertise among policymakers, forest user groups, and implementing agencies poses barriers to smooth implementation and stakeholder engagement. Inadequate private sector involvement and public awareness is another issue. Lastly, issues related to equity and fairness are critical, ensuring that revenues and benefits from carbon trading are fairly distributed, especially among indigenous communities and local forest users, is essential for sustaining long-term support and success in carbon finance initiatives.
A Call for Action: Carbon Tax and Domestic Cabon Trade
To tap into carbon finance, Nepal should consider implementing a carbon tax to promote low-carbon behaviors and generate funds for climate action. Creating a domestic carbon trading platform would also prepare Nepal for global market participation. This would allow industries, municipalities, and conservation projects to engage in homegrown carbon transactions, supporting a self-sutaining carbon economy.
Nepal's positioning in the global carbon trade presents both an economic opportunity and a climate responsibility. With its low emissions, carbon-rich forests, and REDD+ support, Nepal can address climate change and earn valuable income for sustainable development. As the world move toward net-zero targets, countries like Nepal, though not major emitter, hold the key to carbon neutrality. With timely investment in policy, infrastructure, and community engagement, carbon trade could open a new chapter in Nepal's green economy.
Dr. Thakuri is Dean of Graduate School of Science and Technology at Mid-West University of Nepal.
