Nepali Forests as Global Carbon Banks

The World Bank estimates that forests contribute about 0.49% of Nepal’s GDP, mainly from the value of selling timber. In the fiscal year 2023/24 (2079/80 BS), agriculture, forestry, and fishing combined made up about 24.10% of GDP. However, this number does not include potential income from global carbon banks, which forests could also provide.

The ‘global carbon bank’ refers to an international system in which countries earn carbon credits by reducing deforestation or emissions, and these credits can then be sold, generating revenue while supporting forest conservation. In practice, forests absorb carbon, and scientists measure how much carbon forests capture from the atmosphere, and this is turned into ‘carbon credits.’ Companies or countries that pollute can buy these credits to offset their emissions. The money from selling the credits goes to the country protecting the forest, particularly to the people and groups managing the forests and supporting local communities.

Nepal has already taken strides in becoming a part of this global carbon bank. However, certain challenges have arisen. This NEFtake explores exactly how forest monetization works, Nepal’s progress regarding it, challenges the country faces to take further action, and potential steps to capitalize on the opportunities provided by the global carbon bank.

How Does Forest Monetization Work in Practice?

The Global Carbon Bank is a system created by global policymakers to pay countries or communities for keeping their forests standing. Developed nations produce large emissions while running factories. To reduce global pollution, they can either cut their own emissions or pay other countries to protect forests that absorb carbon. Paying for forest protection is often cheaper, supports local communities, and helps stabilize the climate. This system of buying and selling carbon credits is part of the global carbon market.

A carbon credit usually represents one ton of CO₂ reduced or absorbed. Scientists measure how much carbon is saved by preventing deforestation, and independent agencies verify these measurements to ensure the credits are real and reliable before they are sold in international carbon markets.

Several mechanisms exist to manage forest carbon finance. Reducing Emissions from Deforestation and Forest Degradation (REDD+) is a major global program that helps countries earn credits by protecting and sustainably managing forests. Voluntary carbon markets allow companies or individuals to buy credits directly from conservation projects. Some countries and organizations also develop national carbon trading systems to regulate credits internally. Together, these mechanisms channel funds to protect forests, support local communities, and help combat climate change.

Steps Involved in Forest Monetization

• Carbon Accounting: Scientists and government officials calculate the amount of carbon stored in forests and estimate potential emissions from deforestation without intervention. This measurement relies on a robust Monitoring, Reporting, and Verification (MRV) system to ensure accuracy and transparency.
• Setting a Baseline: A historic or projected emission level from deforestation is established to serve as a benchmark.
• Avoided Deforestation: If actual emissions from forest loss are lower than the baseline, the difference represents the amount of emissions avoided because of conservation efforts. These avoided emissions are quantified as carbon credits or emission reductions.
• Selling Credits: The verified emission reductions become carbon credits. These credits can be sold in international or voluntary carbon markets to companies or countries aiming to offset their emissions, generating revenue to finance ongoing forest protection and benefit local communities involved in conservation.

Real World Examples of International Forest Finance

Several bilateral and multilateral arrangements show that forest preservation has become part of the global financial system. Here are some examples of such arrangements:

• Amazon Fund – Norway and Brazil: Since 2008, Norway has committed more than USD 1 billion to Brazil’s Amazon Fund, rewarding reduced deforestation in the Amazon rainforest. Payments are released only after Brazil verifies and reports reduced forest loss.
• Guyana – Norway and Germany: Guyana, with one of the world’s lowest deforestation rates, secured over USD 250 million from Norway and Germany to maintain forest cover. This partnership rewards maintaining forests rather than restoring lost ones.
• Corporate Engagement – Peru and Microsoft: Microsoft bought carbon credits from the Alto Mayo Conservation Initiative in Peru, run with Conservation International and local communities. This offsets emissions from Microsoft’s operations while funding biodiversity conservation and community development.

Nepal’s Legal Framework

Nepal’s legal framework recognizes forests as valuable assets in the global carbon market. The Environment Protection Act (2019) and Rules (2020) allow the government, communities, and private sectors to trade carbon credits earned from forest conservation. The National REDD+ Strategy (2018) promotes sustainable forest management and ensures that indigenous people, local communities, women, and marginalized groups receive a fair share of the benefits. It emphasizes free, prior, and informed consent (FPIC) and active participation of indigenous groups in decision-making. Building on this framework, a Supreme Court directive (2023) also mandates aligning national laws with the Paris Agreement, a global treaty where countries committed to limiting greenhouse gas emissions to fight climate change. By following this directive, Nepal reinforced its commitment to climate responsibility, social justice, and sustainable development. Together, these measures enable the country to earn income from forest protection while upholding rights and promoting environmental equity.

Nepal’s Role: A Model for Community-Based Forest Management

Nepal is widely recognized for its pioneering Community Forestry Program, which empowers local communities to manage and protect forest resources sustainably, granting them legal rights and responsibilities. Over 23,000 user groups manage about one-third of the country’s forests, and programs. By involving communities directly, Nepal has improved forest conservation, enhanced biodiversity, and supported rural livelihoods.

In addition to this, Nepal is actively involved in the global carbon market through mechanisms like REDD+, part of a global United Nations effort to reduce emissions from deforestation and forest degradation. By protecting forests and measuring stored carbon, Nepal earns carbon credits that can be sold internationally, generating funds for conservation and local communities. Nepal has been involved in REDD+ since the early 2000s, piloting projects in districts like Gorkha, Lamjung, and Chitwan. The country even implemented a REDD+ program across 13 districts in the Terai Arc Landscape, covering 1.7 million hectares. From 2018 to 2024, the program reduced approximately 2.4 million tonnes of CO₂ emissions. At a rate of USD 5 per tonne, this resulted in an income of NPR 1.06 billion (approximately USD 8 million). Currently, the ‘REDD+ Himalaya in Nepal’ project is also taking place which involves government bodies, indigenous people, and the civil society.

Besides REDD+, Nepal is also exploring other approaches such as voluntary carbon markets, where individuals and companies can buy carbon credits voluntarily without being bound by law or regulations, and developing its own carbon trading systems. These efforts help Nepal fight climate change while improving the lives of people who depend on forests.

Further, in 2021, Nepal signed an Emission Reductions Payment Agreement (ERPA) with the World Bank for up to USD 45 million. Payments depend on verified reductions in forest-related carbon emissions, primarily in the Terai Arc Landscape, home to critical biodiversity and Indigenous communities.

Challenges in Nepal

While Nepal has made significant progress in conserving its forests and monetizing the conservation, the country faces challenges in ensuring fair benefit sharing, as governments or large organizations sometimes receive most payments while indigenous people and local communities get limited compensation. Addressing this imbalance is crucial for social equity and sustained community involvement.

Additionally, improving the accuracy of measurement, reporting, and verification (MRV) systems is another challenge, given the technical complexity of quantifying carbon stocks and avoided emissions. A reliable MRV system is essential for credibility in carbon markets and fair financial returns.

Balancing forest conservation with livelihood needs requires strategies that support both environmental goals and local well-being. Securing FPIC from indigenous groups and ensuring land rights are respected are vital ethical and legal considerations.

Finally, the long-term nature of carbon finance demands sustained forest protection over decades, requiring ongoing support for communities to maintain conservation efforts.

Looking Forward: Can Forests Pay Fairly and Sustainably?

Nepal’s forest carbon initiatives have significant economic potential by generating revenue through carbon credit sales, which can support rural livelihoods and national development. Income from carbon markets can fund community projects, improve forest management infrastructure, and create forestry-related jobs.

To maximize these benefits, policies must ensure transparent and equitable distribution of financial gains, particularly to indigenous people and local communities who depend on forests culturally and economically. Strengthening community participation and recognizing traditional knowledge can enhance sustainable forest stewardship while preserving cultural heritage. Moreover, integrating forest carbon finance with broader rural development strategies, such as education, health, and alternative livelihoods, can also reduce poverty and prevent migration driven by environmental degradation.

However, while forest monetization and carbon markets are valuable tools for climate action, they are not a total solution to climate change and must be complemented by broader reductions in greenhouse gas emissions.