The global market for high-integrity carbon credits is in the grip of a peculiar crisis. The corporate demand is surging, however, verified credits are running dry, and Nepal is unusually well placed to respond to it.

Corporate climate commitments rose 227 percent in 2025. Credit retirements, which is often used as a measure of actual market demand, have declined. Serious buyers are looking for verified, nature-based emission reductions. Demand exists, but buyers are no longer willing to purchase weak credits. The shortage is in credible supply.

Nepal’s carbon sector is one of the most underappreciated economic opportunities in the world. Buyers looking for credible credits are increasingly looking at countries like Nepal. Yet Nepal has earned only a fraction of what it needs from carbon markets, barely 0.02 percent. In fiscal year 2025-26, AEPC reported around $35.27 million in carbon revenue from household biogas, improved water mills and micro-hydro projects, while Nepal has also begun earning from forest-carbon programmes such as the Terai Arc Landscape REDD+ payment.

Forests cover 46.08 percent of Nepal’s land, up from 29 percent in 1994, making it one of the most successful community forest management systems studied and replicated across Asia. The country also holds 83,000 megawatts of hydropower potential, with approximately 42,000 MW considered economically viable, and has run on 100 percent renewable electricity for years. It has no manufacturing base and no legacy of industrialisation. For generations, its agricultural communities have been living low-carbon lives by practice. Nepal is a country that has barely produced any emissions. And the world's carbon buyers know it.

Nepal has made a formal promise to the world under its Nationally Determined Contribution (NDC), the climate commitment every country files under the Paris Agreement. Nepal has pledged net-zero emissions by 2045. Meeting those targets requires an estimated USD 121 billion in climate finance by 2035. Carbon markets are among the most direct mechanisms available to meet the target. In 2019, Yeti Airlines sought to become carbon neutral and needed roughly 19,665 credits. Finding nothing accessible in Nepal, it bought from Indian hydropower projects instead.

The market exists, but Nepal has not built enough accessible projects to serve it. However, carbon credits only become tradeable assets when the country makes clear laws, strong institutions, recognised investment channels, and communities that understand the value they are creating.

From law to execution

Until December 2025, Nepal’s environmental law recognised carbon trading only under the Kyoto Protocol. It expired in 2020. For four years, private developers had no clear legal basis to operate in this space. The Carbon Trading Regulation, 2082, became Nepal’s first legal framework for carbon trading, which signalled that the government was finally beginning to see carbon as an economic sector.

But a law alone does not make the process easier. Carbon projects need technical review, verification, approval, authorisation and registry before credits can be sold. This requires institutions with expertise, resources and continuity. In May this year, the Ministry of Forests and Environment was merged into the new Ministry of Agriculture, Forests and Environment. A very frequent problem of institutional knowledge and momentum that had to be rebuilt once again.

For example, Ghana became the first country to complete a bilateral carbon credit transfer under Article 6 with Switzerland, despite not having the same natural resource advantages as Nepal. It did so by building a separate Carbon Market Office, which gave investors long-term security that could survive political changes.

Investment gap

Nepal’s carbon trading regulation permits joint ventures between foreign entities and Nepal-registered firms. The investors can legally establish carbon-related joint ventures, but the approval system still appears to lack a clear standalone category for carbon trading and carbon project development. As a result, projects that could bring foreign capital, employment and investment into energy, agriculture, waste management and industry face delays and uncertainty.

Awareness gap

As important as regulations are, it is equally crucial for communities to understand what carbon credits are. How they are generated, and how benefits return to them. A 2025 study in Environmental and Sustainability Indicators found that only 5.76 percent of farmers have high awareness of carbon credits. Nearly 20 percent of those below the poverty line have no knowledge of them at all.

This is crucial because Nepal’s carbon value is created largely through local stewardship. Agreements like LEAF may bring international recognition and finance, but the actual value is created by communities protecting forests, managing land, and sustaining low-carbon practices. If communities do not understand the value they are helping create, they cannot demand a fair share. Lessons from India, Congo, Borneo and Zimbabwe show that if communities are excluded or uninformed, carbon projects lose trust and often fail. Closing this awareness gap must be part of building the market.

Ticking clock

Another ticking clock is Nepal’s LDC status. Nepal's LDC status confers automatic additionality on carbon projects. A lower evidentiary threshold that makes project registration faster, cheaper, and more attractive to developers globally. This applies to community forestry, micro-hydro, agricultural methane, clean cooking, urban waste, and many other eligible sectors. It is expiring in November 2026. The government has formally requested a three-year extension from the United Nations Committee for Development Policy. That request may be granted but an extension should be viewed only as a temporary reprieve. The window of urgency still remains.

The Voluntary Carbon (VC) market has already channeled over 237 million tonnes of credits. Bangladesh, Cambodia, the Democratic Republic of the Congo, Malawi, Uganda, and Zambia, hold over 75 percent of all LDC credits. Bangladesh holds about 22 percent. Nepal holds a tiny fraction, despite having better forests, water, and agriculture.

Nepal contributes 0.056 percent of global greenhouse gas emissions. Last year, floods killed 249 people, in 2024 a glacial lake outburst swallowed an entire village, and climate-related damage cost an estimated $345 million. This is roughly what a strong tourism year brings in. These are the crises Nepal had almost no hand in creating. Carbon markets were designed, at least in their original conception, to begin correcting that injustice.

The next 12 to 18 months are unusually important for Nepal to properly utilise this market. The country must study successful global models closely, think steps ahead, and build its own institutional pathway before the best buyers move elsewhere.