Adopted in May 1992, the UN Framework Convention on Climate Change (UNFCCC) aims primarily to stabilise the anthropogenic emissions of greenhouse gases (GHGs) in the atmosphere. The Kyoto Protocol (KP), adopted in December 1997,provisions, inter alia, for the first quantified emission limitation and reduction (QELR) commitmentperiod (2008 – 2012),and emission trading throughInternational Emission Trading (IET), Joint-Implementation (JI) and Clean Development Mechanism (CDM).

IET and JI promotes carbon trading between countries responsible for GHGs emissions, and CDM between developed and developing countries. Article 12 of the KP defined the CDM to assist both developing and developed country Parties in achieving sustainable development, and compliance with QELR commitments. Although voluntary on participation, CDM provides benefits to developed countries to comply with the GHGs emissions reduction commitments and developing countries additional funds from sale of carbon credits for sustainable development initiatives. Nepal participated in CDM-based carbon trading, being the developing country.

Nepal entered the carbon market by approving two biogas projects after being a Party to the KP in December 2005. The Alternative Energy Promotion Centre (AEPC) has registered 7 CDM projects (4 biogas and a micro-hydro, and two PoAs(Programme of Action) of biogas and improved cooking stoves) between December 2005 to March 2015 (https://www.aepc.gov.np/pages/carbon-and-climate-change)that are approved by the then Ministry of Environment (MoE), Designated National Authority (DNA) for the CDM projects before the adoption of the Paris Agreement in 2015.

Recalling other CDM projects, DNA-CDM issued approval letters for PDD (Project Design Document) and/or its development to organisations such as Centre for Rural Technology, WWF, Pioneer Wires and Hulas Steel Industries to projects related to cooking stoves, biogas, and biomass gasification for thermal energy and electricity generation in 2009. The ADB Report (2021) informs 6 small-scale CDM projects and 4 PoAs of Nepal registered with the CDM Executive Board (EB).

A Programme of Activities (PoA) of the clean bricks production in Nepal has been registered with the CDM EB in August 2022. MoFE-DNA issued an approval letter of this brick production programme to the Climate Advocacy International as Programme Participant and/or Coordinating and Managing Entity in July 2021.

Two additional projects are implemented to reduce GHGs emissions. Nepal has signed an agreement with the World Banks' Forest Carbon Partnership Facility in February 2021 to reduce 9 million tons of carbon dioxide emissions in the Terai Arc Landscape area. The World Bank will provide US$ 45 million as results-based payments for carbon emission reduction from deforestation and forest degradation through 2025. This financing is expected to address the drivers of deforestation and forest degradation and help to incentivise community actions in forest management in Nepal. However, high intensity forest fires each year may be a big challenge to comply with the provisions of this agreement.

The Green Climate Fund has approved a US$ 49.2 million project on mitigating GHG emission through modern, efficient and climate friendly clean cooking solutions (CCS) in October 2021 with its grant of US$ 21.1 million to AEPC. Planned for completion by December 2027, this project targets to avoid 6.5 million tonnes of emissions, promote adoption of clean cooking solutions in the Terai region and build institutional capacity of 150 local governments in renewable energy sector, install 5 lakhs electric stoves, 4 lakhs and 90 thousand improved cooking stoves and 10 thousand biogas plants. GCF has already disbursed US$ 2.9 million to implement the project activities.Increase in clean energy supply – the hydroelectricity – might encourage local people towards electric stoves than improved cooking stoves.

To promote Nepal's participation in carbon trading, sustainable development criteria was developed in 2007 to approve CDM projects and PoAs. A CDM Section in the Climate Change Management Division (CCMD), established in 2010 under MoEwas responsible to facilitate, promote, coordinate and regulate carbon trade activities. MoE-CDM Section made all possible efforts to invite public and private sectors to engage in carbon trade. It established a transparent process to evaluate the CDM projects and PoAsthrough administrative decisions. It worked well till 2017.

After merging of environment component with forests in 2018, MoFE was restructured with 5 sections under CCMD. MoFE's CCMD should, inter alia, 'facilitate mitigation measures and carbon trade' and act as the CDM's DNA. Five

Sections are on Climate Change, Adaptation, Mitigation, Climate Technology, and GHG Measurement Sections. The 2010 CDM Section dedicated to carbon trading is no more now.Based on public information, MoFE-CCMD has issued an approval letter for a brick programme between 2018 and August 2024.

The Environment Protection Act (EPA, 1996) and its Rules (1997) did not provision for carbon trade. Section 28 of the EPA (2019) has empowered the Government of Nepal (GoN) to participate in carbon trade for the mitigation and conservation of carbon emissions and allocation of benefits resulted therefrom as prescribed.

The Environment Protection Rules (EPR, 2020) elaborates provisions to promote and regulate carbon trade. As per Rules 28, GoN may sale carbon stock, received from sustainable management of forests, in national or international markets, and reduced carbon emission from other activities may also be sold through GoN, any association or private sector. Rules 29 provide a Technical Committee to evaluate the concept paper and PDD, and Rules 30 establishes the Steering Committee to provide suggestion on PDD. At present, REDD Implementation Centre (IC) through WB's supported programme and AEPC through CDM, PoAand GCF projects are engaged in implementing GHGs emissions reduction projects and programmes. Rules 29 and 30 provision for representations from REDD ICand AEPC in both permanent Technical and Steering Committees. Under Rules 31 provisions, MoFE is to function as DNA along with its functions, rights and duties.

After four years of enforcement of the EPR (2020), MoFE called for inputs on the proposed first amendment of this EPR on 16 August 2024. The proposed amendments are basically focussed on impact assessment (IA) process, and carbon trade. The proposed amendments on IA sare simply related to few procedural aspects with the need for inclusion of wildlife friendly structure in linear projects that use forests, community safeguards and disaster management plan and addition of a format for supplementary EIA.MoFE did not consider need for amendments on technical aspects related to priority issues in a public notice for scoping, terms of reference, alternative analysis, environment management plan, timing for public hearing and collection of recommendation letters from the local government(s) and prescribed organisations. Similar situation exists for clarifying Strategic Environmental Analysis (SEA) which is required for a project as well.

The proposed amendment empowers the province government to take part in carbon trade, replaces CDM projects by 'any project or social and economic activities that reduce GHGs emissions', introduces carbon trade in voluntary markets,calls for compliance with the UNFCCC and its mechanisms, and linkages with the nationally determined contribution (NDC). New provisions added are related to the listing of a project or an activity that plans to participate in carbon trading, submission of project idea note (PIN) and PDD along with a recommendation letter of the local level for approval by MoFE and implementing organisation to provide at least 80 percent of the benefits from carbon trading to the project beneficiaries. This provision will likely distract the private sector'sparticipation in carbon trading.

Under Rules 29 provisions for technical evaluation of PIN and PDD by a Technical Committee, MoFE may issue a concurrence letter to prepare a PDD after payment ofafee ranging from NRs. 20 to 50 thousand for small, medium and large-scale projects. The Steering Committee (Rules 30) shall be established under the chair of the Secretary of MoFE to provide suggestions, and MoFE may issue the approval letter to the PDD after payment of the prescribed fee ranging from NRs. 50 to 120 thousand. As mentioned above, REDD IC and AEPC are represented in both permanent committees. To avoid conflict of interest, participation of REDD IC and AEPC in both committees should only be limited to projects of other organisations. The Technical Committee alone can perform the review and suggestions. The proposed amendments also provision for inclusionsof the project and carbon credits into the Registry before project implementation. It also provisions to allocate ten percent of the total carbon credits of any project to attain the national targets in minimising carbon emissions as mentioned in the GoN approved NDC.

The Rules proposed for amendments also provisions to pay royalty @ of NRs 25 per carbon credit before selling the product. MoFE is empowered to submit a report to UNFCCC Secretariat and its established mechanism for corresponding adjustment on carbon trade and carbon credit. DNA is made responsible for, inter alia, increasing participation of private sector and approving to transfer the CDM units into the mechanism of the Paris Agreement. CoP29/CMP19/CMA6 at Baku, Azerbaijan in November 2024 will likely make substantial decisions to promote carbon trading under the Paris Agreement by establishing a clear link with KP provisions.

The proposed amendment provides a format for self-monitoring and provisions to submit the report every six month to the concerned agency and the Department of Environment. The additional provision on environmental auditing sounds good but may complicate on timing. The fundamental is to conduct evidence-based auditing within the specified time as financial audit.

Budget statement of the Minister for Finance to the Parliament in mid-May 2024 also provisions for carbon trading and utilise the received money from carbon trade to develop community capacity of those highly vulnerable to climate change.

The Policy Research Institute (PRI) organised a discussion programme on 25 August 2024to collect experts' opinions. GoN is encouraged to facilitate and regulate environmental assessment process to make the development projects sustainable, and facilitate, coordinate and regulate carbon trade by ensuring effective participation of the private sector to generate more investment in addressing climate change impacts, and benefiting the climate vulnerable poor people.

In a nutshell, the proposed amendment neither addresses the existing issues on environmental assessment nor ensures effective participation of the private sector on carbon trade. It might rather distract private sector participation in carbon trading due to provision of at least 80 percent to project beneficiaries, 10 percent allocation to NDCs, and may be the proposed royalty fee.