Nepal's successful biogas program has given farmers a non-polluting fuel, conserved forests and provided great fertiliser for the fields. Now, it looks like the rest of the world wants to pay us hard cash for not burning firewood to release carbon dioxide into the atmosphere.

The United Nations Framework Convention on Climate Change has set up a Clean Development Fund and the World Bank has put together a Carbon Finance Unit to allow rich countries, which are pumping more carbon into the atmosphere than is allowed under the Kyoto Protocol, to 'buy' emissions that poor countries prevent by conserving forests or promoting renewable energy. Although the Kyoto treaty has not yet been ratified, these countries are trying to get ahead in the game.

So Nepal can trade the carbon it hasn't emitted into the atmosphere through its biogas program and collect a cool $5 million! The government and the World Bank last week signed a letter of intent for the deal. The World Bank's Prototype Carbon Fund has set up a separate Community Development Carbon Fund, which aims to help grassroots development schemes that also offset carbon emissions.

Nepal's biogas program is internationally regarded as a model for successful use of alternative energy for the rural Third World. Each of Nepal's 125,000 functioning digesters prevents five tons of carbon dioxide from being pumped into the atmosphere every year. Nepal has now overtaken China and India in the number of biogas plants per capita. This 'saved' gas is what rich countries are buying to reach their own emission quotas. The $5 million is expected to be ploughed back into clean energy that would make Nepal eligible to trade even more carbon.

"We have an initial agreement with the World Bank," confirmed Sundar Bajgain, executive director of the Biogas Support Project, which has played a lead role in installing biogas plants in private houses in 66 districts across the country. The biogas model can be applied to other renewable energy sources such as hydropower and solar power to reap rewards from carbon trading. For instance, if electrical vehicles replace diesel ones, Nepal could sell saved carbon emission amounts to industrialised countries.

"If we could make hoteliers use electric broilers instead of fossil fuels, we could save carbon emissions at the end users level," says Bikash Pandey of Winrock International, which has been pushing the carbon trading concept in Nepal.

The International Panel on Climate Change (IPCC) also promotes the construction of hydropower plants below 15MW for carbon trading. If the plants are located in remote areas, they qualify for reimbursement under the Community Development Carbon Fund. "When such construction takes place in rural areas, the project needs additional finance, which is a strong qualification for carbon trading," says Ratna Sansar Shrestha, a carbon trading expert.

But there are some practical hurdles before Nepal can start reaping the bonanza. For example, it would be expensive for a transport entrepreneur to switch from fossil fuel to electricity, as diesel is subsidised and electricity rates in Nepal are among the highest in the world. In rural areas, a solar cell costs money while firewood from the forest is free.

Around 85 percent of the fuel Nepalis consume comes from biomass sources like firewood, animal manure and agricultural residue. The remainder is made up by kerosene, diesel or LPG while not even two percent of the energy used in Nepal is electricity. Even biogas would not have been possible if the 125,000 users had not received foreign-supported subsidies. Each biogas unit costs $300 to set up, but the government pays one-third of the amount.

"Since the clean technology needed for carbon trading requires investment, the government must consider customs rebates for the import of the equipment," argues Pandey. Experts say the direct cost incurred make renewables appear expensive, but they bring environmental and health benefits.

The other challenge Nepal faces with carbon trading is what is known as 'the baseline'. Since most plants and factories here already use hydropower, we have a poor baseline to shift to clean energy and sell the carbon emission it prevents. Unlike in India, where most power plants use coal, if the Indian government converts all of them into clean energy, the greenhouse gases thus prevented can be traded for dollars. If India purchased hydropower to replace its thermal plants from Nepal, who would get the rights for carbon trading? That is still debatable, and is one of the issues that the carbon traders haven't yet resolved.

Other options to reduce greenhouse gases are also being proposed. A report prepared by the European Biomass Industry Association and the World Wide Fund for Nature (WWF) claims that switching to farms producing ethanol and other biomass as fuel would create hundreds of thousands of jobs while helping reduce CO2 emissions. "It could reduce CO2 by about 1 billion tons each year," the report said. Biomass currently provides only one percent of the power needs of rich countries, but could provide up to 15 percent by 2020. Unlike fossil fuels, burning biomass is considered 'carbon neutral'.

But fossil fuel use is on the rise, even in conservation-minded countries like Japan and Scandinavia. Japan's greenhouse gas emissions increased 2.2 percent in 2002 from the previous year. Norway's carbon dioxide emissions jumped in 2003 and remain far above Oslo's Kyoto Protocol targets. Since the Kyoto Protocol has not yet been ratified, some of these rich countries want to buy emission rights from poorer countries and have created funds under the United Nations' Clean Development Mechanism (CDM) as well as the World Bank's Prototype Carbon Fund.

Nepal and other developing countries will therefore continue to have ready buyers for the greenhouse gases they save through clean energy or providing carbon 'sinks' in the form of forests. Even private companies and factories can, under the CDM, be able to offset excess greenhouse gas emissions by investing in green projects in developing countries.