Can Nepal Benefit from Forest Carbon Financing? An Assessment of Opportunities, Challenges and Possible Actions

Carbon financing has emerged as a possible regulatory or voluntary market instrument to reward reforestation. Reducing Emissions from Deforestation and Forest Degradation (REDD) is now being proposed as an instrument for this. Likewise, a substantial section of the voluntary market has shown a willingness to buy forest carbon. This report analyses whether Nepal’s forest sector can benefit from these opportunities, how, and under what conditions.

A number of REDD design issues are yet to be settled, and the architecture of REDD financing depends on these: should REDD be based in a compliance market or be fund-based or mixed? What should be covered within creditable mitigation activities? What approach to payments should be adopted: inputs, emissions or stock-based approaches? What scale (national, sub-national, local or nested) should be used in crediting? How should REDD be implemented – baseline, monitoring and verification, leakage and non-permanence? How it be ensured that REDD does not create undesirable social and ecological trade-offs and that it creates equitable co-benefits?

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 channelling funds to reward developing countries in checking deforestation and forest degradation. 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 chunk of Nepal’s forest is still under government control, and deforestation is continuing in this. By contrast, the 20% 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, which need to be addressed.

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 Copenhagen 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 to be better prepared on the ground for possible REDD and 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:

Action line 1: Accelerate National REDD Readiness Processes

While Nepal’s Ministry of Forests and Soil Conservation (MFSC) has already started the REDD readiness process through forest carbon partnership facilities (FCPF) funding support, there are signs of slow action, lack of coordination and lack of technical backstopping. Also, the process seems to be dominated by professionals and technical experts with weak representation from marginalized sections of Nepal’s civil society. The readiness process 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.

Action line 2: Strengthen Preparation for International REDD Negotiations

Given that Bonn SBSTA meeting in June 2009 is planning to draft the potential REDD agreement, it is now time for Nepal to intensify its homework on its positions and perspectives. Throughout the year of 2009 until Copenhagen, MFSC and Nepali stakeholders should work collectively, and in collaboration with the Ministry of Environment, Science and Technology (MoEST), to develop a position, generate the evidence needed and to undertake lobbying with common interest groups and countries. These activities should start in January 2009 if Nepal is to complete some meaningful groundwork for the ongoing international REDD negotiations.

Action line 3: Develop PES Methodologies Through Piloting at Sub-national and Community Levels

While the carbon sequestration services of forest ecosystems has come to the forefront due to the climate change crisis, there are indeed multiple environmental services which forests generate. There is a need to bundle diverse environmental services and institute mechanisms for rewarding the providers of such services. To date, there is hardly any experience to translate this concept into practice, although there are some spontaneous mechanisms which look like PES in Nepal 1 – so 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.

Action line 4: Undertake Resource Analysis, Data Generation and Monitoring

It is widely accepted that ecosystem data are limited and out of date in Nepal. 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 the government, non-government and private sectors.

Action line 5: Promote Community Forestry in The Voluntary Markets

Given that REDD will take a few years to come into effect, and recognizing that the voluntary market is already proliferating, it is recommended that Nepal forestry stakeholders 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 REDD process. Besides, by 2012, there will already be some concrete insights into whether, how and to what extent voluntary markets should be pursued when some form of REDD begins to be operational. These activities should be initiated as soon possible so that some concrete lessons can be learned by 2012.