KP Sharma

Paro—While Bhutan is celebrated for its commitment to environmental conservation, the country is yet to fully capitalise on its extensive forest cover to engage with global carbon markets.

Each year, Bhutan’s forests absorb millions tonnes of carbondioxide—a resource that remains largely underutilised due to current carbon accounting frameworks.

These frameworks often exclude natural carbon sequestration, which occurs without direct human intervention, from being classified as ‘additional’.

Moreover, the carbon stored in Bhutan’s forests is not permanently sequestered, as natural decay could release it back into the atmosphere.

A promising avenue for Bhutan lies in carbon-linked bonds, which could enable the country to monetise its environmental contributions.

Bob Litterman, chairman of climate policy and founding partner at Kepos Capital LP, proposed that Bhutan issue sustainability-linked bonds tied to specific environmental targets.

He explained that these bonds could function similarly to real return bonds used in the United States, where bonds are tied to inflation and protect investors from fluctuating rates.

For Bhutan, these bonds would be connected to carbon price movements, offering both the government and investors a clearer outlook on future carbon prices. “By creating a carbon price index similar to inflation indexes, Bhutan could attract investment in low-carbon solutions and encourage private sector participation,” he said.

While he acknowledged the political challenges of taxing carbon, he said that doing so could create market expectations and incentives for carbon trading, ultimately enhancing Bhutan’s carbon market credibility.

The director of the Department of Environment and Climate Change, Sonam Tashi, said that Bhutan stands to gain from these bonds, but highlighted the challenge of securing sufficient financial resources.

Although Bhutan’s constitution mandates environmental protection, the country has struggled to generate financial returns from this asset. “The government has estimated that USD 14 billion will be required for climate adaptation in the coming decades, including USD 1.4 billion over the next five years.”

He said that although Bhutan has already implemented green taxes on fuel and vehicles, there is a need for a robust legislative framework to support bond issuance and regulate carbon emissions from industries.

The chief economist at the Environmental Defence Fund, Suzi Kerr, highlighted the importance of shared resources in the carbon market, adding that Bhutan could benefit from speeding up its carbon-linked initiatives.

However, she cautioned about the challenges carbon markets face, including inconsistent policies and fluctuating prices.

Suzi Kerr called for concrete policies to protect Bhutan’s environment while keeping investors confident.

The CEO of Carbonbase, Max Song, acknowledged the technical challenges within the carbon market but urged Bhutan to take the lead in establishing a carbon market mechanism. “Bhutan has a unique opportunity to receive payments for its role in sequestering carbon on behalf of the world,” he said.

He suggested implementing incentives to encourage both companies and individuals to participate in conservation and regeneration efforts. “The government should efficiently allocate financial resources to attract more investment and foster sustainable development.”