Nepal Environment Sector Diagnostic: Path to Sustainable Growth Under Federalism (A COUNTRY ENVIRONMENTAL ANALYSIS) June 2019 © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Disclaimer: This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Direc- tors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomina- tions, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions: The material in this work is subject to copyright. 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TABLE OF CONTENTS Acknowledgments ............................................................................................................................................................. iv Acronyms and Abbreviations ............................................................................................................................................. vi Executive Summary ........................................................................................................................................................... ix Better Harnessing Natural Resources for Sustainable Growth ...................................................................................... ix Mitigating Adverse Impacts of Growth on the Environment and Natural Resources ................................................. xiii Strengthening Governance for Sustainable Development Under Federalism ...............................................................xix Summary of Recommendations ...............................................................................................................................xxiii 1. THE CONTEXT .........................................................................................................................................................1 1.1. Nepal’s Constitution of 2015 ....................................................................................................................................... 1 1.1.1. Federalism ........................................................................................................................................................ 1 1.1.2. Sustainable Growth .......................................................................................................................................... 1 1.2. Nepal’s Economy and Plans for Sustainable Growth..................................................................................................... 2 1.3. Nepal’s International Commitments ............................................................................................................................ 4 1.4. Opportunities and Risks for Sustainable Growth Under Federalism ............................................................................. 4 1.5. Objective and Content of the Environment Sector Diagnostic ..................................................................................... 5 2. BEttER HARNESSING NATURAL RESOURCES FOR SUSTAINABLE GROWTH .........................................................................6 2.1. Sustainable Forest Management ................................................................................................................................... 6 2.1.1. The Asset .......................................................................................................................................................... 6 2.1.2. Gains From Community-Based Forest Management ........................................................................................ 7 2.1.3. An Underperforming and Threatened Asset ...................................................................................................... 8 2.1.4. National Policies Related to Forest Management .............................................................................................. 8 2.1.5. Estimating Rents and Government Revenues From Nepal’s Forests ................................................................ 10 2.1.6. Capacity and Policy Enhancement Needs for Successful Implementation of SFM .......................................... 12 2.2. Sustainable Nature-Based Tourism ............................................................................................................................. 16 2.2.1. Current and Potential Contribution to the Economy ..................................................................................... 16 2.2.2. Constraints to Realizing the Higher Potential ................................................................................................. 18 2.2.3. Risks .............................................................................................................................................................. 19 2.2.4. Toward Sustainable, Higher-Value, and Inclusive Nature-Based Tourism ........................................................ 19 2.3. Sustainable Hydropower Development ...................................................................................................................... 21 2.3.1. Environmental Risks Associated With Hydropower and Ancillary Facility Development ................................ 21 2.3.2. Institutional and Regulatory Framework ........................................................................................................ 22 2.3.3. Watershed Management ................................................................................................................................. 23 2.3.4. Environmental Flows ..................................................................................................................................... 25 2.4. Environmentally Friendly and Climate-Smart Agricultural Intensification ................................................................. 26 2.5. Sustainable River Quarrying ...................................................................................................................................... 28 3. MITIGATING ADVERSE IMPACTS OF GROWTH ON THE ENVIRONMENT AND NATURAL RESOURCES ......................................30 3.1. Reducing Environmental Pollution and Related Costs to the Economy ..................................................................... 30 3.1.1. Levels and Sources of Pollution ...................................................................................................................... 31 3.1.2. Calculating the Cost of Pollution ................................................................................................................... 38 3.1.3. Health Burden................................................................................................................................................ 39 NEPAL ENVIRONMENT SECTOR DIAGNOSTIC: PATH TO SUSTAINABLE GROWTH UNDER FEDERALISM 3.1.4. Economic Costs of Environmental Pollution .................................................................................................. 40 3.1.5. Policy Options for Reducing Pollution ........................................................................................................... 42 3.2. Building and Maintaining Green and Resilient Roads ................................................................................................ 51 3.2.1. Strategic Road Network.................................................................................................................................. 52 3.2.2. Local Road Network ...................................................................................................................................... 53 4. STRENGTHENING GOVERNANCE FOR SUSTAINABLE GROWTH UNDER FEDERALISM ...........................................................58 4.1. Division of ENR-Related Powers According to the 2015 Constitution ...................................................................... 59 4.2. Status of ENR-Related Regulations to Implement the 2015 Constitution .................................................................. 62 4.2.1. Environmental Impact Assessment ................................................................................................................. 64 4.2.2. Compliance Monitoring, Inspection and Enforcement ..................................................................................