For years, Nepal successfully used the Clean Development Mechanism (CDM) under the Kyoto Protocol. This system helped finance small-scale hydropower and biogas projects by allowing them to sell carbon credits. However, the global climate framework has changed. The Paris Agreement introduces a more complex and rigorous system, requiring Nepal to adapt its approach to carbon trading.

The new rulebook is primarily defined by Article 6 of the Paris Agreement. This article establishes two main pathways for international carbon trading, replacing the older CDM system. For Nepal, this means projects that were once straightforward to register now face a higher bar for approval and verification.

Article 6 creates a framework for countries to cooperate in achieving their emissions reduction targets, known as Nationally Determined Contributions (NDCs). It’s split into two key mechanisms.

Under Article 6.2, countries can engage in bilateral agreements to trade credits, which are called Internationally Transferred Mitigation Outcomes (ITMOs). Article 6.4 establishes a new supervisory body to register projects that reduce emissions, creating credits that can be bought by countries or corporations to meet their climate goals. Many of Nepal's existing CDM projects are now seeking to transition to this new Article 6.4 mechanism.

The shift from the CDM to Article 6 introduces stricter requirements, primarily focused on two principles: additionality and avoiding double counting.

The biggest change, however, is the new system to prevent double counting. Under the Kyoto Protocol, this was less of a concern because only developed nations had binding emission targets. Now, under the Paris Agreement, almost all countries have their own NDCs. This creates a risk: a project in Nepal could reduce emissions, sell a credit to another country, and both Nepal and the buying country could claim the same reduction. To prevent this, the system requires Corresponding Adjustments to be made.

This means that if Nepal authorizes the sale of a carbon credit from a hydropower project to an international buyer, its government must adjust its own national emissions inventory. The emission reduction is transferred to the buyer's country and can no longer be counted toward Nepal's NDC. This process ensures that every reduction is counted only once.

Nepal's Ministry of Forests and Environment (MoFE) acts as the Designated National Authority, responsible for authorizing any project participation in Article 6 markets. The procedure for transitioning a CDM project or starting a new one involves several key steps. The government must formally approve the project and agree to make a corresponding adjustment upon the eventual sale of any credits.

This new, centralized oversight ensures that all carbon trading activities align with Nepal's national climate strategy and contribute to sustainable development without compromising the country's own targets. For project developers, this means earlier and more sustained engagement with the government is essential for success.

Time for a quick check on these new concepts.

The transition to the Paris Agreement's framework presents both challenges and opportunities for Nepal. By establishing clear procedures and embracing the new standards for integrity and transparency, the country can continue to leverage international carbon markets to drive investment in its green transition.