Nepal stands on the threshold of a major climate finance opportunity in the form of carbon revenue. As international carbon markets begin to take shape under Article 6 of the Paris Agreement, Nepal has the potential to attract significant investment into renewable energy, clean cooking, biogas, electric mobility and other low-carbon sectors. While understanding and interest towards Article 6 carbon market is gradually increasing, one critical challenge remains unresolved: how to finance these projects before carbon revenues begin to flow.
This is where Nepal's commercial banks could play a transformative role.
For years, discussions on climate finance have focused on governments, donors and development finance institutions and this still remains valid in the recent context of climate finance support for Nepal. However, if Nepal is serious about accessing carbon revenue through climate investment, commercial banks may ultimately become the crucial bridge between climate ambition and implementation.
The key lies in a relatively new instrument known as a Mitigation Outcome Purchase Agreement (MOPA).
A MOPA is essentially a contract under which a buyer—typically a government such as Sweden or a climate fund—agrees to purchase future emissions reductions generated by a project. Under Article 6, these emissions reductions can be transferred internationally as Internationally Transferred Mitigation Outcomes (ITMOs), allowing another country to use them towards achieving its climate targets. A MOPA therefore creates visibility over a future revenue stream linked to climate performance.
The challenge is that most MOPAs are structured on a "pay-on-delivery" basis. In other words, developers receive payment only after emissions reductions have been verified and transferred. The project must still find the money needed to cover development costs, purchase equipment and begin operations long before any carbon revenue arrives.
This timing mismatch is one of the biggest barriers to climate investment across the developing world, and Nepal is no exception.
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Many climate projects are economically sound over the long term but struggle to secure capital during their early stages. Without upfront financing, promising investments in renewable energy, clean cooking and waste management can remain stuck on the drawing board despite their environmental and economic benefits.Nepal faces this challenge acutely.
Traditionally, Nepalese banks have relied heavily on collateral-based lending. While this approach has helped maintain prudence within the banking sector, it can limit financing for innovative projects where future cash flows may be stronger than the value of physical collateral.Climate projects often fall squarely into this category.
As Article 6 markets mature, Nepal's banks have an opportunity to broaden their approach by incorporating future contracted revenues into credit assessments. This does not mean abandoning conventional risk management. Rather, it means recognising that a well-structured, government-backed or multilateral-supported MOPA can strengthen the overall financial profile of a project.
Importantly, a MOPA should not be viewed as a substitute for traditional security. At least in the near term, it is more realistic to see it as a credit enhancement tool—one that improves project bankability by providing greater confidence in future revenues.
This distinction matters.Banks are understandably cautious about treating carbon revenues as a standalone source of repayment. Article 6 is still in its infancy. Verification systems, regulatory frameworks and market infrastructure continue to evolve. Questions around timing, authorisations and delivery risks remain.
Yet caution should not be confused with inaction.Globally, innovative financing structures are emerging, that seek to convert future carbon revenues into present-day capital. Development finance institutions, impact investors and commercial lenders are increasingly exploring ways to lend against contracted environmental outcomes, particularly where credible buyers and robust legal frameworks exist.
Nepal is beginning to build the foundations for similar transactions. Organisations such as the Global Green Growth Institute (GGGI), working alongside the Government of Nepal and market participants such as the Swedish Energy Agency and the Alternative Energy Promotion Centre, are helping strengthen Article 6 readiness, support project development and facilitate the conditions needed for future transactions. The objective is not to replace commercial finance, but to help create a pipeline of investment opportunities capable of attracting it.
A well-structured MOPA-backed financing arrangement could include assignment of future carbon revenues, escrow accounts and other safeguards familiar to project finance professionals. In such structures, carbon revenues become an additional source of comfort for lenders, helping improve debt-service capacity and overall project viability.
For Nepal's banking sector, this represents more than a climate opportunity. It is a business opportunity.
Green finance is no longer a niche market. Globally, investors are seeking greater exposure to sustainable assets, while financial institutions are looking to expand climate-aligned portfolios. Nepalese banks such as have already demonstrated growing interest in renewable energy and sustainable infrastructure. Building expertise around carbon finance is a natural next step.
To realise this potential, several conditions must be met.
First, regulatory clarity is essential. Lenders need predictable processes for Article 6 authorisations from government, carbon credit ownership and issuance.
Second, capacity building within the financial sector remains critical. Carbon markets introduce concepts such as, corresponding adjustments, international carbon accounting—all of which remain unfamiliar to many traditional lenders.
Third, greater standardisation of MOPAs would improve confidence across the banking sector. Consistent contractual terms and transparent risk allocation can make carbon-linked revenues easier to understand and finance.
Finally, development partners and multilateral institutions have an important role to play in de-risking early transactions through technical assistance, guarantees and blended-finance structures. Their contribution is most valuable when it enables domestic financial institutions to participate confidently and eventually take the lead.
Nepal does not lack climate projects. Nor does it lack entrepreneurial developers. As Article 6 transactions begin to move from concept to reality, commercial banks have a unique opportunity tobecome active partners in Nepal's low-carbon transition. Nepal’s Bank may unlock not only new business opportunities for themselves, but also significant investment for Nepal's climate and development goals.
Sharma and Bhuju are Fund Manager and Carbon Associate, respectively, at GGGI’s Article 6 Climate Cooperation Fund ACCTIF at the Global Green Growth Institute
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