Nepal advances on carbon trading, but who benefits?

Nepal received its first-ever $9.4 million (around NRs 1.19 billion) from the World Bank’s Forest Carbon Partnership Facility (FCPF) in November last year, followed by the rollout of its Carbon Trading Regulation 2025 a month later.

The payment follows the reduction of approximately 1.88 million tonnes of carbon dioxide under its REDD+ Emission Reductions Program in the Terai Arc Landscape (TAL) during the crediting period from June to December, 2024. It is the first disbursement under the country’s Emission Reductions Payment Agreement (ERPA).

The recently introduced regulation opens further opportunities, allowing the private sector to participate in the market, with sectors like hydropower, forestry, and agriculture allowed to earn foreign currency by selling emission reduction credits. The new framework allows Nepal to engage in carbon trading through bilateral agreements (as per Article 6 of the Paris Agreement), open competition, or non-market mechanisms within voluntary carbon trading. 

More recently, the country signed an agreement with the LEAF Coalition that could generate up to $55 million in carbon trade at the coalition’s minimum price of $10 per tonne.

With over 6.6 million hectares of land covered with forests and wooded lands, Nepal is often viewed as well positioned to monetise its forest resources through carbon trading. The country has spent over a decade preparing to do that, and tap into the global carbon market. But these developments also raise a critical question: who ultimately benefits from carbon trading?

How carbon monetisation works

Emission reductions are first verified through independent assessments that measure how much carbon dioxide was avoided through reduced deforestation and forest degradation. Governments must have policy and legal frameworks that allow carbon credits to be generated and transacted. Verified credits are then registered in carbon registries so they can be sold.

Countries negotiate credit sales with governments, corporations or funds such as the FCPF. Payment proceeds are required to be reinvested in forest restoration, livelihood enhancement, community enterprises and climate resilience. For Nepal, this represents the beginning of a process through which the financial value of forests, long captured informally or lost through inefficiencies, can begin flowing back into communities and public institutions.

Who gets what: The benefit sharing plan

The benefit sharing plan developed through consultations across the TAL, outlines how the $9.4 million will be distributed. The plan allocates 80% to community forest user groups and government forest agencies based on their performance in emission reductions. 

5% is allocated to private forest owners, while another 5% is reserved for forest-dependent households that are not part of any forest user group and will receive non-monetary support such as seedlings, tools and training. The remaining 10% goes to federal, provincial and local governments to cover administrative and operational costs. The same plan applies to the LEAF Coalition as well.

Meanwhile, the carbon trade regulation mandates a 5% contribution to national targets (NDC) and a 10% revenue share for the government, while ensuring community benefit-sharing and robust monitoring (MRV) under Paris Agreement rules.

Conservation success has costs too

Climate and environment expert Ujjwal Upadhyay highlights that Nepal’s celebrated conservation successes have come with significant costs to indigenous people and forest-dependent communities.

He notes that many communities have faced reduced access to ancestral forests as conservation restrictions expanded. Human–wildlife conflict has intensified sharply, with rising populations of tigers, rhinos and elephants causing more crop damage and livestock losses. Traditional livelihoods tied to forest-use rights have weakened over time.

Upadhyay emphasises: “Indigenous and forest-dependent communities have experienced shrinking access to the ancestral resources they relied on for generations.” These economic and cultural losses rarely appear in climate finance accounting, raising questions about equity and justice within REDD+ programs.

Governance challenges in Nepal’s forest economy

Upadhyay points to long-standing governance weaknesses within Nepal’s forestry institutions. Valuable hardwoods such as sal, sissoo, chandan, teak and khair often rot in depots due to administrative delays, while timber value chains remain opaque and vulnerable to political capture. In several locations, range posts and division offices are shaped by private interests and local power networks, undermining the credibility of forest management.

These challenges mirror the World Bank’s own assessments, which categorise governance risks under the Emission Reductions Program as substantial. The Bank’s 2024 Implementation Status & Results report also highlighted that the operational guidelines for the Forest Development Fund, established under Section 45 of the Forests Act, 2019, were still pending, a situation that remains unchanged as of November 21, 2025. Without these guidelines, doubts persist over how swiftly and transparently REDD+ payments can flow to communities.

These governance concerns are further complicated by differing expectations around how REDD+ proceeds should be used. REDD+ funds are international, results-based payments like the recent $9.4 million Nepal earned for verified reductions in deforestation and forest degradation. The FDF is Nepal’s domestic mechanism for receiving, managing and distributing these payments along with other forest-sector revenues.

Yet observers note that institutions like the World Bank often favour directing such funds into return-generating investments such as ecotourism infrastructure or community enterprises rather than social transfers like scholarships or direct livelihood support for Indigenous and forest-dependent households.

Such an approach can limit the flexibility of communities to decide how benefits should be allocated and may overlook the social and cultural costs they have borne for decades.

Ultimately, the central question remains: will the money reach the people who have protected the forests? Experts and civil-society representatives stress that payments must not be absorbed by administrative layers or diverted into politically driven projects. Indigenous people and forest-dependent households who face the greatest burdens of conservation must be recognised as primary beneficiaries.

Transparency in fund flows, public disclosure of payments and strong audit mechanisms will be essential to maintaining trust in Nepal’s REDD+ process. As Upadhyay puts it, “The real challenge now is ensuring that this money reaches the communities and indigenous people who have actually protected the forests, and that it does so transparently.”

Payout for forest conservation, but does it go far enough?

The TAL holds some of the country’s richest biodiversity and most fragile human–forest relationships. It covers nearly 17% of the country with a network of six protected areas, forests, agricultural lands and wetlands, with over six million people depending on its forests for food, fuel, and medicine.

The payment rewards Nepal for slowing deforestation, improving forest governance, expanding forest cover and enhancing sustainable forest management across the TAL. Community forests, buffer zones, protected areas and conservation regions, long regarded as flagship conservation models globally, played a central role in these results.

The $9.4 million payment is historic not for its size, but because it marks the country’s formal entry into results-based climate finance. Spread over nearly seven years of conservation efforts, it raises doubts about whether returns from REDD+ adequately compensate for the resources invested and the opportunity costs borne by communities and the state. Nepal has consistently prioritised conservation over constructions and infrastructure development. While Nepal’s conservation efforts are widely praised, domestically it has raised some serious questions on how the nation can balance environmental needs with higher economic growth, attracting large-scale investments and infrastructure needs. 

These tensions were evident in April 2024 when the Prachanda-led government introduced an ‘ordinance to amend some Nepal Acts to facilitate investment’ that would allow the government to grant private investment, including foreign, in the country’s infrastructures across protected areas, which covers around 23.4% land area of the country. Though endorsed by Parliament, the ordinance was later annulled by a constitutional bench following a writ petition.

One dissenting justice warned that such a verdict will restrict infrastructure development in areas of alternative to energy sources and other robust and costly infrastructures, tourism and cross-border transport.

Another criticism arises from the potentially restrictive rules embedded in the carbon trading framework and strategy, while industrialised countries are not compelled to reduce emissions domestically. These restrictive provisions are apparent in the LEAF Coalition agreement. 

Carbon markets: Potential versus reality

Several industry estimates show that the current voluntary carbon market is nascent, estimated roughly between 2-4 billion dollars with projections at $100 billion by 2030. According to UN Trade and Development (UNCTAD), evidence from several case studies indicates that the broader development benefits of carbon market participation—such as technology transfer, education, and community development—are uncertain in least developed countries (LDCs).

UNCTAD further notes that LDCs hold significant potential in carbon markets, particularly in forestry and agriculture, with the capacity to generate carbon credits equivalent to around 2% of total global emissions. Yet, only about 2% of this potential was realised between 2020 and 2023, largely due to weak project feasibility, limited institutional capacity, and low carbon prices.

UNCTAD warns that if carbon prices remain near $10 per tonne, most of this potential will remain untapped even by 2050. Achieving scalability in sectors such as forestry and agriculture would require carbon prices closer to $100 per tonne.

Similarly, an IMF study finds that addressing global climate challenges would require large-emitting countries to introduce a carbon price of around $75 per tonne by 2030.

Against this backdrop, Nepal’s experience illustrates the gap between market potential and reality. Nepal’s first carbon payment was priced at $5 per tonne, and its most recent agreement at minimum $10 per tonne, levels well below what is widely considered transformative.

Risks of dilution of the broader climate agenda

For climate-vulnerable countries such as Nepal, carbon trade presents a valuable opportunity to access much-needed finance. Carbon trading as many see is not a solution to the larger global climate crisis, nor to Nepal’s growing climate risks, as the mechanism pays for specific reductions, and not for the broader loss and damages.

Globally, critics see carbon markets risk shifting attention from the core priority of reducing emissions at their source. This is true for Nepal as well, as Nepal’s voices in international platforms and its own expectations are largely confined to discussions around accessing finance, but that may do little for Nepal if the emitters are given free hand without accountability.