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Abstract

Carbon financing has emerged as a possible regulatory or voluntary market instrument to reward carbon sequestration. This report analyses whether Nepal’s forest sector can benefit from carbon financing opportunities, how, and under what conditions.

Carbon financing is likely to operate, and is already operating to a certain extent, through the compliance market, through voluntary markets with formal or informal mechanisms, and through fund-based mechanisms. All of these are being considered as possible ways of channeling funds to reward developing countries for checking deforestation and forest degradation.

Reducing Emissions from Deforestation and Forest Degradation (REDD) is being proposed as a promising instrument. However there are a number of issues around its design yet to be worked out, regarding for example, what is creditable, what payments are made for, the scale used for crediting, and equitable benefit distribution. REDD principles acknowledge creating a compliance market for carbon, and it is likely to credit national level emissions reductions against a baseline reflecting the past and projected deforestation and degradation. There is also a strong argument in favour of fund-based mechanisms to support policies, institutions and methodologies for carbon offsets. REDD benefit to Nepal also depends on how the baseline is defined and what is included within the scope of creditable activities.

A major portion of Nepal’s forest is still under government control, and deforestation is continuing in this. By contrast, the 21% of the forest area now under community management has already shown signs of revival and restoration. This variation in deforestation rates presents some challenges for Nepal in taking a unified national stance on selecting the baseline. If community forestry is to be rewarded for its early action on sustainable forest management, deforestation in the low-lying Terai has to be addressed in parallel. In this context, Nepal may propose to opt for, or participate in, multiple modes of REDD instruments (and to advocate for them internationally) to match the situations in the hills, the Terai and the high hills. This has potential to benefit community forestry, but overall national revenues may be lower than using the national crediting approach.

The characteristics of community forestry have both promising and weak aspects. Carbon offset by community forestry is fragmented across many small forests, locked into overall biodiversity and livelihood systems which often favour low carbon-yielding species and forest compositions. Also,Nepal’s carbon offset level is small compared with high deforestation countries like Brazil, Indonesia and others which may attract more international buyers. The unique opportunity for Nepal’s community forestry is found in marketing the performance of credible and resilient community based institutions for forest management and their roles in adaptation and poverty reduction, for which a fund based mechanism may be better suited. There are also voluntary markets which value small-scale carbon forestry with livelihoods and biodiversity co-benefits (such as Plan Vivo and Community, Climate Change and Biodiversity Standards).

There are a number of policy issues and gaps that need to be addressed to enable communities to receive benefits from carbon financing. While pilot initiatives are required to develop models of REDD at sub-national and local levels, several policy issues have to be addressed before a carbon financing mechanism can be initiated: clarifying carbon tenure and benefit sharing, creating or defining state agencies for regulating carbon financing mechanisms, recognizing and monitoring intermediaries (to verify, assess, quantify carbon stocks and offsets), and mechanisms for checking fraud and corruption. There are also likely to be implications for fiscal, tax and trade related policies.

Looking at these issues at home, and recognizing the specific REDD proposals being debated internationally, Nepal should develop its specific proposals which should guide participation in the REDD debate until COP 15 in late 2009. Nepal should not just rely on carbon focused financing but advocate a comprehensive reward package that supports policy, institutions, procedures and sustainable management of forests. Also, it is worthwhile to institute systems for the payment of environmental services instead of carbon services alone. Nepal has a real opportunity to lead other countries with strong community forestry and to advance such an agenda in the international negotiations.

Given the on-going negotiations and limited ground level experience and data, there is a need for Nepal to be better prepared on the ground for possible REDD and other carbon financing mechanisms. These preparations include: piloting and testing institutional, technical and marketing methodologies; facilitating multi-stakeholder dialogues from local to national levels; research and analysis on ecological, institutional, policy and marketing aspects of carbon financing; and developing a national forestry, climate change, and payment of environmental services (PES) strategy. Based on these, five strategic actions are recommended:

1. Accelerate the national REDD readiness processes. It should be supported and strengthened by donors and independent policy research groups during 2009-2012. Such support should include ensuring inclusive processes, adequate analysis of local and global scenarios, capacity development, and development of an appropriate national strategy.
2. Strengthen preparations for international REDD negotiations. Throughout 2009 until COP 15, Ministry of Forests and Soil Conservation and Nepali stakeholders should work collectively, and in collaboration with the Ministry of Environment, Science and Technology , to develop a position, generate the evidence needed and to undertake lobbying with common interest groups and countries.
3. Develop PES methodologies through piloting at sub-national and community levels. There is a need to pilot, experiment and innovate PES methodologies and institutions that help market carbon and other environmental services, as well as distributing the revenues equitably. These actions should be undertaken immediately so that there will be enough lessons to inform REDD readiness, international REDD negotiations, and implementation of the post-2012 climate regime.
4. Undertake resource analysis, data generation and monitoring. In order to maximize benefits from the marketing of environmental services, credible baselines and mechanisms for monitoring and verification have to be established. Currently, Nepal lacks such capacity and there is a need to strengthen this in government, non-government and private sectors.
5. Promote community forestry in the voluntary markets. Given that REDD will take a few years to come into effect, forestry stakeholders should undertake experimental marketing of forest carbon in the voluntary market. This will enable stakeholders to learn what it takes to sell carbon in the market, and most aspects of methodology practiced in the voluntary market will also be useful in the REDD process.