Carbon Trading, Foreign Investment, and Sustainable Development – Nepal’s Intersectional Approach

Carbon trading is a market-driven system designed to combat global warming by reducing greenhouse gas emissions, particularly carbon dioxide produced through the burning of fossil fuels. Through carbon markets, companies, and individuals can offset their emissions by purchasing carbon credits from entities that actively reduce or eliminate greenhouse gas emissions. The global adoption of clean development mechanisms (CDM) and emissions trading systems have risen since the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) paved the way for formal carbon markets in 1997, overcoming several legal hurdles. Apart from the European Union Emissions Trading System (EU ETS), several nations, including Canada, China, Japan, New Zealand, South Korea, Switzerland, and the United States, have either adopted or are in the stages of developing their own domestic or regional emissions trading systems.

Nepal’s Carbon Trade Deal

Nepal and other developing countries strive to reduce deforestation and forest degradation to enhance forest carbon stock. In recognition of its emission reduction efforts, Nepal signed a meaningful agreement with the Forest Carbon Partnership Facility (FCPF) in 2021. This achievement positions the country fifth in the Asia-Pacific region and 12^th globally. With a substantial 44.74% of its land covered by forest areas, Nepal possesses immense potential for generating revenue through carbon financing. Nepal has embarked on the Emission Reductions Payment Agreement (ERPA) to actively combat carbon dioxide emissions, aiming to achieve a reduction of 9 million tons.

Under this agreement, Nepal will receive USD 5 for every ton of carbon dioxide emission successfully mitigated. However, a precautionary measure is being taken by reserving around 23% (equivalent to 7.9 million tons) of the estimated carbon dioxide reduction resulting from forest cover in 13 districts. This buffer is meant to address potential carbon dioxide releases in the event of forest fires. Out of the remaining estimated reduction of 26 million tons, only 10 million tons are anticipated to be available for trading within the agreement’s timeframe spanning from 2018 to 2025. Thus, the current agreement encompasses trading 9 million tons of carbon dioxide emissions. However, to evaluate Nepal’s progress in reducing carbon dioxide emissions and to unlock revenue from carbon financing, Nepal’s carbon stock has to undergo two assessments: one was done in 2021 and another is due in 2025.

Benefits of Carbon Trade Deal in Nepal
The carbon trade-deal agreement plays a vital role in Nepal’s strategic program on forest landscapes and climate action. This innovative financing agreement serves as a powerful tool to address the underlying causes of deforestation and forest degradation while simultaneously inspiring and mobilizing communities across the country. As part of this initiative, a strong emphasis on improving community-based forest management, granting local communities user rights over national forests, enhancing integrated land use planning, promoting alternative energy sources, and strengthening the capacity for managing protected areas will be done. Together, these measures will contribute to the sustainable management of forests and the mitigation of climate change impacts in Nepal.

The carbon-trade deal can benefit Nepal in many aspects, some of which are explained below:

1. Environmental Aspect: Carbon trading facilitates environmental improvement and reduces carbon emissions through various measures. These measures include the adoption of clean energy to avoid emissions, sustainable land use management, afforestation, and efforts to curtail deforestation. Forests act as carbon sinks to stabilize greenhouse gas concentrations and offer ecosystem benefits such as watershed protection and flood mitigation. Carbon credits serve as a powerful incentive for individuals and governments alike to protect this critical natural resource against the emerging threats of settlement, industrial, and agricultural expansion in Nepal.
2. Economic Aspect: The carbon trade agreement offers incentives for community-based forest management initiatives aimed at reducing carbon emissions and enhancing carbon stocks through various forest management activities. With the utilization of the carbon fund, Nepal expects to sell approximately 9 million tons of carbon dioxide equivalent (CO2e) at a rate of USD 5 per ton of CO2e, resulting in a total revenue of USD 45 million by 2025. In addition to direct carbon finance, there are also many long-term auxiliary benefits such as increased revenues from eco-tourism and forest-based industries due to improved forest management.
3. Social Aspect: Participating in carbon markets and results-based payment for emissions reduction, developing nations like Nepal have the opportunity to promote their socio-economic progress while transitioning towards a low-carbon economy. Innovative carbon financing can catalyze private and public investments needed to fund green and sustainable developmental activities such as rural electrification through clean energy projects. For example, Ghana, a developing nation, similar to Nepal, has committed to achieving a significant reduction of 64 MtCO2e (Metric tons of CO2e) in greenhouse gas emissions by 2030 through its Nationally Determined Contribution. Ghana aims to implement a climate-smart agriculture program, training over 10,000 rice farmers (representing 80% of rice production) to adopt sustainable practices. This includes using the alternate wetting and drying (AWD) technique, periodically drying paddy fields instead of continuous flooding, and reducing methane emissions without compromising rice productivity. These efforts are anticipated to yield significant benefits such as reduced methane emissions, higher crop yields, and improved water efficiency.

The global focus on sustainability and environmental responsibility has intensified, leading numerous countries and businesses to adopt ambitious carbon neutrality objectives. A strong dedication to attaining net-zero emissions makes a nation an appealing destination for foreign direct investment (FDI) from countries and corporations looking to offset their carbon emissions. Actively pursuing net-zero emission goals can establish Nepal’s leadership among developing countries in transitioning towards a low-carbon economy, thereby attracting investment from both domestic and international entities.

Attracting FDI by Reaching Net-zero Emission Goal: A Possibility for Nepal
The implementation of carbon emission trading policies has significant implications for foreign direct investment due to various factors. As these policies decrease transaction expenses for multinational corporations and capitalize on their benefits through well-defined property rights exchange. As a result, FDI inflows are effectively promoted. Policies like linking FDI taxes to carbon emissions can be another approach for investment projects. This means that lower carbon footprints would result in lower tax burdens, incentivizing low-emission/emissions reduction investments. Governments can also facilitate access to green finance, which represents a significant pool of capital in the trillions of dollars. This can be achieved by leveraging support from development finance institutions and international mechanisms to fund carbon-neutral FDI projects. The pilot implementation of carbon emission trading policies in China demonstrates that it not only aids in emission reduction but also increases FDI inflows. This dual benefit helps foster the coordinated development of the environment and the economy, highlighting the positive role of carbon emission trading policies in attracting investment and achieving sustainable growth.

Conclusion

Transitioning to zero emissions through energy-efficient technologies and practices helps businesses achieve cost savings by reducing energy consumption, lowering utility bills, and operational expenses. Countries endowed with abundant and reliable sources of clean energy, such as wind, solar, or hydroelectric power, like Nepal can attract FDI from energy-intensive industries seeking to power their operations with renewable energy. Nepal’s carbon trade deal through the Reducing Emissions from Deforestation and Forest Degradation (REDD) program initiated in 2021 offers environmental, economic, and social benefits. It promotes clean energy adoption, curtails deforestation, improves land use and forest management, and contributes to environment and climate co-benefits. Participation in carbon markets incentivizes community-based forest management, generates revenue through carbon credits, facilitates socio-economic progress, and helps finance the transition to a low-carbon economy. Furthermore, the implementation of carbon emission trading policies in Nepal has the potential to attract FDI by reducing transaction costs and offering clear property rights trading. This dual benefit of emission reduction and increased investment promotes the coordinated development of the environment and the economy, driving sustainable growth.