Nepal has entered a new phase of climate financing, with the recently published Carbon Trading Regulation, 2025. Despite having one of the lowest per capita emissions in the world, with less than 0.05 percent of the global greenhouse gas emissions, the country remains vulnerable to climate change. The new regulation could be a game-changer for the country’s development trajectory, inviting not only environmental but also societal and economic benefits.

When it comes to the National Determined Contributions (NDCs), Nepal has performed relatively well in areas such as forest conservation, with coverage now reaching 46 percent. Nepal recently received $9.4 million from the World Bank’s Forest Carbon Partnership Facility for the verified emissions reduction in the Tarai region. Similarly, for over two decades, the country has recognised the value of carbon credits, earning over $35 million through Clean Development Mechanism (CDM) projects such as biogas usage as fuel and micro-scale renewable projects promoted by the Alternative Energy Promotion Centre (AEPC).

Given Nepal’s massive forest area, booming hydropower sector and globally praised community forestry model, the new regulation offers an opportunity for a more structured and systematic approach to carbon finance. The decisions Nepal takes in the next few years will determine whether the country can emerge as a regional leader in high-integrity markets or simply become another cautionary tale.

The new regulation is only the first step. It has formally opened doors to market-based finance across sectors, including forestry, agriculture, hydropower, clean cooking, transport and waste management. With this clear approval pathway from project concept to validation, verification, registration and credit issuance, the private sector can now engage in what used to be a development partner-focused sector. Building a national digital carbon registry is a crucial step in tracking credits and preventing double-counting.

Nepal’s commitments in the global treaties, such as the Paris Agreement, are reaffirmed with this new regulation. Article 6.2 of the agreement allows for bilateral trade emission reduction agreements known as Internationally Transferred Mitigation Outcomes (ITMOs). In the COP29 summit held in Baku in 2024, Nepal signed a bilateral cooperation agreement with Sweden under the article. A recent MoU between ProClime from India and the Independent Power Producers’ Association of Nepal (IPPAN) also aims to issue renewable energy certificates for up to 2,000 megawatts of hydropower capacity, generating $7 million annually in carbon value. The clarity brought by the new regulation gives such initiatives a clearer pathway and sends a positive signal to investors.

The new regulation comes at a critical period where the world has breached the 1.5 degrees Celsius temperature limit, and Nepal has started to realise the adverse effects of climate change. The shrinking of Nepal’s lakes and growing Glacial Lake Outburst Floods (GLOFs) are exposing our vulnerability. The carbon market opens a new avenue if maintained well, offering income from reducing and removing emissions.

Balancing public benefit and market viability is equally important. The government has mandated that around 5 percent of credits should be reserved for Nepal’s own NDC commitments, and 10 percent of private sector carbon revenues generated will be allocated for the government. If a project is designed carefully, the measure could ensure carbon trading will support both national climate goals and public revenue.

The demand for carbon credits is increasing globally, with the voluntary carbon market alone projected to reach $50 billion. Cross-border mitigation transfers are expected to further increase this number. The countries that win from this wave will be those that comply with high-integrity market standards and establish clear rules. Nepal is already well-positioned to meet the expectations of global carbon buyers, given its significant natural advantages. Millions of tonnes of carbon are absorbed each year by community-led forests. Furthermore, Nepal’s electricity grid is arguably the cleanest energy source in South Asia, and the rapid shift towards electric vehicles and clean cooking—if well-documented and verified—can generate large volumes of credible emissions reductions.

Even on a conservative estimate, carbon revenues could generate at least 0.5 to 1 percent of the current GDP. However, achieving scalability is crucial across key sectors, including hydropower exports, electric mobility and waste management. As a low-income, climate-stressed economy that requires at least 10–15 percent of GDP investment in infrastructure annually, the revenue generated from carbon can significantly aid capital formation. It could help finance climate-resilient infrastructure and the energy transition without adding to public debt.

Administrative hurdles have historically been a major bottleneck in Nepal’s development sector, and the same issue could plague the carbon market. With slow or uncertain approvals, project developers may relocate to faster-moving economies. Improper Monitoring, Reporting and Verification (MRV) systems would undermine the credibility and risk rejection by high-integrity buyers. Nepal’s reputation in the international market could even be damaged for years. At the same time, with the growing economy, efforts must also be made to decarbonise domestically to meet Nepal’s own NDC targets.

Clear lessons could be learned from the experience of other countries. Ghana, for instance, became the first country to successfully engage in a bilateral agreement for emission transfer with Switzerland, largely due to early investment in a national registry, clear benefit-sharing arrangements and robust systems for corresponding adjustments. Indonesia’s unified carbon pricing framework provided the simplicity and regulatory clarity expected by the private sector, connecting the voluntary market to national climate targets. Meanwhile, Singapore has set a high bar standard by moving decisively towards higher integrity over volume, allowing only rigorously verified International Carbon Credits. Conversely, the experience of Kenya, where controversies surrounding low-integrity forest credits and community backlash resulted in detrimental political reputational damage, shows the risk of getting it wrong.

Focusing on carbon governance, ensuring compliance and community benefit-sharing guided by a robust digital MRV system is the fundamental initial step. Sectors which have clear competitive advantages, such as hydropower, agro-forestry and urban mobility, must be prioritised. In addition, Nepal needs a clear national carbon strategy that defines how much carbon can be allocated for export and how much must be retained to meet domestic targets. It cannot afford to delay or send mixed signals, or it will miss this new wave of opportunity entirely.

Nepal now has the policy in place and stands at a critical juncture in the new climate finance agenda. Carbon markets do not provide all the answers, and they can certainly be a double-edged sword given the inherent complexity and reputational risk. Nevertheless, for a low-emitting, nature-rich country, the benefits far outweigh these risks, presenting a rare opportunity to earn revenue while preserving ecosystems and accelerating the clean energy transition. The regulation lays a good foundation. How the stakeholders take it from here will decisively determine the country’s green economic future for years to come.