SOUTH ASIA BHUTAN World Bank Group BHUTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT PAVING THE WAY FOR RESILIENT AND DIVERSIFIED ECONOMIC GROWTH JUNE 2025 © 2025 The World Bank Group 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of the International Bank for Reconstruction and Development (IBRD), the International Development Asso- ciation (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA), collectively known as The World Bank Group, with external contributors. The World Bank Group does not guarantee the accuracy, reliability or completeness of the content included in this work, or the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. ACKNOWLEDGMENTS  The Bhutan Country Climate and Development Report (CCDR) was produced by a core team led by Rangeet Ghosh (TTL) and Wanli Fang (Co-TTL), comprising (in alphabetical order by first name) Alvin Etang Ndip, Anders Jensen, Arati Belle, Camilla Knudsen, Chung Gu Chee, Ewa Sobczynska, Florent McIsaac, Hannah Messerli, Houda Kara- fli, Joachim Vandercasteelen, Jumana Alaref, Maximilian Fischbach, Melanie Simone Trost (TTL at the concept stage), Michel Ragnvald Mallberg, Nancy Tulsyan, Natasha Bernadette Chapplow, Natasha Kapil, Sandhya Srini- vasan, and Yumeka Hirano.  The CCDR synthesizes analytical work and sectoral inputs provided by an extended technical team comprising (in alphabetical order by first name) Brent Boehlert, Diego Castillo, Dzenan Malovic, Esther G. Naikal, Jana Lemke, Jia Li, Joris Bücker, Jun Rentschler, Junko Narimatsu, Kamalika Das, Kenneth Strzepek, Kim Smet, Kok Zi Cheng, Kristoffer Welsien, Matthew Brian Gough, Meerim Shakirova, Naho Shibuya,, Paolo Avner, Ross Marc Eisenberg, Rui Su, Shawn W. Tan, Shruti Vijayakumar, Sunil Kumar Khosla, Svetlana Valieva.  Assistance in data collection for the Adaptation and Resilience Diagnosis was provided by Bramka Arga Jafino, Pema and Dechen Tshering.  The team benefited greatly from comments and suggestions from the peer reviewers Alice Brooks, Joanna Masic, Martin Heger and Muthukumara S. Mani.  The Bhutan CCDR was a collective effort of the World Bank Group, including the World Bank, International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA), and was prepared under the guidance of Martin Raiser, Adama Coulibaly, Abdoulaye Seck, Cecile Fruman, Dina Umali-Deininger, Mathew A. Verghis, Imad Fakhoury, Conor Healy, Martin Holtmann, Christian Albert Peter, Hoon Sahib Soh, Abhas Jha, Thomas Michael Kerr, Gyongshim An, and Souleymane Coulibaly.   Support for logistics and communications was provided by Tshering Yangki, Mehrin A. Mahbub, Rosemary Birungi Kyabukooli, Ugyen Tshering Pelden and Dorji Drakpa.  Lucy Southwood provided excellent editing support. The Report was designed by Alejandro Espinoza/sonideas.com.  This CCDR benefited from discussions with the Royal Government of Bhutan, including the Ministry of Finance, Ministry of Energy and Natural Resources, Ministry of Agriculture and Livestock, Ministry of Infrastructure and Transport, the Department of Local Government & Disaster Management, Ministry of Home Affairs and the Druk Green Power Corporation.  B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T IV  CONTENTS Acknowledgments IV Abbreviations and acronyms IX Executive summary 1 Bhutan’s economic and environmental achievements 3 Bhutan’s climate challenges 4 Tackling the twin challenges: diversifying growth while building resilience 8 Enablers: climate finance and institutional strengthening 11 Policy recommendations 13 1. Bhutan’s development achievements, climate challenges, and opportunities 16 1.1. Developmental and environmental achievements 17 1.2. Climate risks and implications for the economy and people 19 1.3. Bhutan’s adaptation and resilience (A&R) readiness 30 2. Strengthening resilience in key sectors: hydropower, agriculture, and cities 35 2.1. Resilient hydropower 36 2.2. Climate-smart agriculture (CSA) 41 2.3. Resilient cities and infrastructure 49 3. Facilitating the transition toward a greener and more diverse economy 57 3.1. Green jobs and the labor market 58 3.2. Green transition of the tourism sector 63 3.3. Realizing the economic potential of forestry 68 3.4. Creating jobs in a green and diversified economy 71 4. Securing funding for climate change mitigation and adaptation 75 4.1. A nascent financial sector 76 4.2. Climate finance challenges 78 4.3. Meeting the country’s climate financing needs 79 4.4. Building a stronger financial sector 85 B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T V  5. Enhancing coordination at local, national, and regional levels: a key to effective climate change action 89 5.1. Mapping current institutional arrangements 90 5.2. Existing laws and regulatory frameworks, sectoral policies 92 5.3. Technical climate adaptation and mitigation capacity 94 5.4. Local governments and climate change 94 5.5. Constraints on effective implementation 96 6. Policy recommendations 98 6.1. Enhancing climate resilience in key sectors 99 6.2. Diversifying the economy and creating green jobs 101 6.3. Securing climate finance 103 6.4. Strengthening institutions for climate action 105 Appendices 106 APPENDIX A. Climate modeling and selection of climate scenarios 107 APPENDIX B. Macroeconomic estimates under climate scenarios 110 References 111 BOXES Box 1. Key policies and frameworks that reflect Bhutan’s climate change commitments 20 Box 2. Climate change projections for Bhutan 23 Box 3. The Gelephu Mindfulness City initiative 51 Box 4. Nature-based solutions for urban resilience 52 Box 5. Support for EV adoption 66 Box 6. The Amazon Reforestation-Linked Outcome Bond 81 Box 7. De-Risking, Inclusion, and Value Enhancement of Pastoral Economies (DRIVE) Project 82 Box 8. Green bond issuance in Bhutan 86 Box 9. Best practice for climate change legislation 93 Box 10. Bhutan at the forefront of community-level adaptation 96 Box 11. Institutional readiness and coordination for climate action in Bhutan 97 FIGURES Figure S1. Hydropower and GDP growth in Bhutan, 1985–2023 3 Figure S2. Greenhouse gas (GHG) emissions in Bhutan, 2000–20 4 Figure S3. Projected hydropower generation change under climate scenarios, 2021–50 5 Figure S4. Spatial growth and exposure to flood hazards in Bhutan’s cities 6 Figure S5. Impact of selected climate shocks on GDP 7 Figure S6. Analytical framework of the Bhutan CCDR 8 B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T VI  Figure 1. Growth in average real per-capita GDP in South Asian countries, percent, 2000–22 17 Figure 2. Change in Human Development Index value in South Asian countries, 2010–22 17 Figure 3. Hydropower and GDP growth in Bhutan (percent), 1985–2023 18 Figure 4. GHG emissions in Bhutan, 2000–20 19 Figure 5. Temperature change trajectories by climate scenario 21 Figure 6. Precipitation change trajectories by climate scenario 22 Figure 7. Impact of climate shocks on GDP 24 Figure 8. Impact of climate shocks on GDP with adaptation 25 Figure 9. Small states most affected by deaths and economic losses related to natural disasters, 1994–2013 26 Figure 10. Exposed population, by hazard type 27 Figure 11. Spatial distribution of EAE and poverty in Bhutan at town level 29 Figure 12. Impact on poverty rate under the dry/hot mean scenario with adaptation 30 Figure 13. Bhutan’s A&R performance across all pillars 32 Figure 14. Country performance across the six A & R pillars 32 Figure 15. Land use plans critical public assets and services 33 Figure 16. Manage residual risks and climate change impacts 33 Figure 17. Installed capacity and firm power capacity in Bhutan, 2024 (MW) 36 Figure 18. Planned energy capacity addition in Bhutan by 2040 37 Figure 19. Average projected monthly runoff, 2041–50 38 Figure 20. Projected hydropower generation change under two climate scenarios, 2020–50 39 Figure 21. Average annual runoff relative to no climate change reference scenario, 2041–50 39 Figure 22. Spatial growth and exposure to flood hazards in Bhutan’s cities 49 Figure 23. Expected flood damage under SSP3–7.0, by development scenario 55 Figure 24. Expected cost of road repair and maintenance, by district, 2041–50 55 Figure 25. Climate change impact on bridge maintenance costs, relative to historical baseline, under an SSP3–7.0 ensemble mean 56 Figure 26. Occupations and employment in Bhutan 59 Figure 27. Average number of green skills by occupation group 60 Figure 28. Greenness of employment in Bhutan 60 Figure 29. Prevalence of unemployed workers in Bhutan, by occupation 61 Figure 30. Unweighted correlation heatmap 62 Figure 31. Bhutan’s aviation activity, 2014–23 65 Figure 32. GHG emissions from aviation and shipping fuels, 2012–20 65 Figure 33. Skills required by tourism workers in Bhutan, sized by number of workers using the skill 67 Figure 34. Distribution of credit, percent, 2017–22 77 Figure 35. Sources of climate finance 79 Figure 36. Bhutan’s environment and climate change institutional framework 90 Figure A1. CMIP6 SSPs 107 Figure A2. GCM selection results for dry/hot and wet/warm futures 109 B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T VII  TABLES Table S1. Summary of recommendations from this CCDR 14 Table 1. Changes in average national temperature and precipitation under mean scenarios, relative to baseline 22 Table 2. EAE, by hazard type 28 Table 3. Impact scenarios for hydropower production: assumptions and limitations 38 Table 4. Exposure of river basins to flooding impacts 40 Table 5. EFA summary for the prioritized CSAIPs 43 Table 6. Summary of qualitative assessment of Bhutan’s readiness to adopt prioritized CSAIPs 45 Table 7. Estimated cost of scaling up CSAIP to achieve 25 percent of 13th FYP targets 47 Table 8. Share of national capital damaged by urban floods 54 Table 9. Unemployment rates in the top 10 green occupations 62 Table 10. Tourism employment, by establishment type (2019) 64 Table 11. Emerging green jobs in the key economic sectors 73 Table 12. Bhutan’s financing needs, as estimated in various national plans 78 Table 13. Policy recommendations for enhancing climate resilience in key sectors 99 Table 14. Policy recommendations on diversifying the economy and creating jobs 101 Table 15. Policy recommendations for securing climate finance 103 Table 16. Policy recommendations for strengthening institutions 105 B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T VIII  ABBREVIATIONS AND ACRONYMS A&R adaptation and resilience DRM disaster risk management AI artificial intelligence Dwb warm-summer humid continental (climate modeling) BBIN Bangladesh-Bhutan-India-Nepal EAE expected annual population exposed BCCI Bhutan Chamber of Commerce and Industry EFA economic, financial, and GHG analysis BDB Bhutan Development Bank EIA environmental impact assessments BESF Bhutan Economic Stabilization Fund EIRR economic internal rate of return BTFEC Bhutan Trust Fund for Environmental ESCO European Skills, Competences, Qualifica- Conservation tions, and Occupations C4 Climate Change Coordination Committee ET tundra (climate modeling) C4CS Committee for Coordinating Secretaries EV electric vehicle CBO community-based organization EWS early warning system CCD Climate Change Division FYP Five-Year Plan CCDR Country Climate and Development GAO Gewog Administrative Officer Report GCF Green Climate Fund CCKP Climate Change Knowledge Portal GCM General Circulation Model CMIP Coupled Model Intercomparison Project GDP gross domestic product CSA climate-smart agriculture GHG greenhouse gas CSAIP climate-smart agriculture investment GLOF glacial lake outburst floods plans GMC Gelephu Mindfulness City CSO civil society organization GNH Gross National Happiness CSR corporate social responsibility GTI green task intensity Cwa monsoon-influenced humid tropical (climate modeling) GW gigawatt Cwb monsoon-influenced temperate oceanic ID identification (documents) (climate modeling) LDC Least Developed Country DDM Department of Disaster Management LoCAL Local Climate Adaptive Living Facility DEC District Environment Committee LTS long-term low-emission development DECC Department of Environment and Climate strategy Change ML million liters DGPC Druk Holding Power Corporation MoAL Ministry of Agriculture and Livestock DHI Druk Holding and Investments MoEA Ministry of Economic Affairs DoFPS Department of Forests and Park MoENR Ministry of Energy and Natural Services Resources B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T IX A bbreviations and acronyms MoESD Ministry of Education and Skills NPPF National Pension and Provident Fund Development NTFP non-timber forest product MoF Ministry of Finance O&M operations and maintenance MoFAT Ministry of Foreign Affairs and Trade OCASC Office of Cabinet Affairs and Strategic MoHCA Ministry of Home and Cultural Affairs Coordination MoICE Ministry of Industry, Commerce, and PFM public financial management Employment PMO Prime Minister’s Office MoIT Ministry of Infrastructure and Transport PPP public-private partnership MRG Mainstreaming Reference Group R&D research and development MRV monitoring, reporting, and verification RCP Representative Concentration Path- MSME micro, small, and medium-sized way enterprise RGoB Royal Government of Bhutan MT million tonnes RMA Royal Monetary Authority MtCO2E million tonnes of CO2 equivalent SME small and medium-sized enterprises MW megawatt SOE state-owned enterprise NAP national adaptation plan SOP standard operating procedures NBS nature-based solutions SSP Socioeconomic Pathway NCHM National Center for Hydrology and UNFCCC United Nations Framework Convention Meteorology on Climate Change NDC nationally determined contribution WBGT wetbulb globe temperature NEC National Environment Commission NEPA National Environment Protection Act All dollar ($) amounts are US dollars NGO nongovernmental organization B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T X EXECUTIVE SUMMARY B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 1 E x ecutive summary Bhutan has made significant strides in advancing human development, supported by strong economic growth and a unique approach to development. Over the past two decades, it has made steady progress in poverty reduction, human development, and environmental conservation, underpinned by revenues from hydropower and a strong policy commitment to sustainability. These achievements are remarkable, considering Bhutan’s mountain- ous terrain and dispersed population, which typically increase public service delivery costs. The country’s focus on Gross National Happiness (GNH) embodies a unique approach to development that values the well-being of its people and the environment, while its dedication to environmental protection has made it a leader in sustainable development. With about half of its land protected to preserve its rich biodiversity and nearly 70 percent forest cover, Bhutan is one of the few countries with a negative carbon footprint. Today, it faces two interrelated challenges: diversifying its economy into new sectors to achieve higher growth and building resilience against climate change impacts. To achieve diversification and create more and better jobs, especially for its youth, Bhutan needs new growth engines beyond hydropower. Enhancing climate resilience in key sectors also requires integrated investments and institutional reforms. Agriculture, hydropower, and tourism— which are key to both livelihoods and exports—are increasingly vulnerable to erratic rainfall, floods, landslides, and rising temperatures. Hydropower infrastructure is vulnerable to pluvial flooding and variable runoff. Small- holder farmers face declining yields, limited market access, and challenges in adopting climate-smart practices. As urbanization accelerates, some cities are expanding into high-risk zones, increasing their exposure to climate hazards. This Country Climate and Development Report (CCDR) highlights the need for targeted public investments to build resilient infrastructure, integrated watershed management, and nature-based solutions (NBS) to reduce climate risks and sustain productivity. Building capacity at all levels, from municipal authorities to frontline farm- ers, is crucial for translating Bhutan’s adaptation strategies into tangible outcomes. Bhutan’s carbon-negative status, high forest cover, and strong institutions position it to lead a new development paradigm with targeted policies that develop new sectors, unlock green jobs, and mobilize climate finance at scale. But the country’s private sector remains small and credit constrained. Green industries are underdeveloped, and employment is largely concentrated in agriculture and the public sector. Diversifying into sustainable tourism, forest-based industries, digital services, and climate-smart agriculture (CSA) offers opportunities to generate jobs and build long-term competitiveness. Strategic enablers for Bhutan include expanding vocational green skills train- ing and streamlining the regulatory environment to develop the private sector. To close the large climate financing gap, Bhutan will need to develop domestic green finance instruments, undertake measures to effectively harness carbon credits, and improve its public financial management systems. Institutionalizing climate-responsive plan- ning is crucial; enacting a dedicated climate law and investing in monitoring and transparency systems will help attract capital and ensure accountability. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 2 E x ecutive summary Bhutan’s economic and environmental achievements Over the past 20 years, Bhutan has achieved steady growth, significant poverty reduction, and improvements in well-being. From 2000 to 2022, excluding 2020, Bhutan’s gross and per capita gross domestic product (GDP) grew annually by 6.6 and 5.1 percent, respectively. In 2022, gross national income per capita reached $3,600, bringing it close to the upper-middle-income threshold of $4,516 (World Bank 2024a). The country is also nearing the eradication of extreme poverty, defined as people living on less than $2.15 per day. Hydropower revenue has been crucial for improving education, health care access, and essential utility provision. Literacy rose from 53 to 70.6 percent between 2005 and 2022, and the country achieved universal electricity access in 2019, and near universal access to piped water in 2022. By capitalizing on its mountainous topography and abundant water resources, Bhutan has harnessed clean, renewable hydropower to drive its economy. With substantial support from India, it has significantly expanded hydroelectric power since the mid-1980s and now generates nearly all its electricity from this clean, renewable source. Since the first hydropower project was commissioned in Chukha in 1987, installed capacity has grown more than sevenfold to 2,453 megawatts by 2024, supporting real GDP growth of 7 percent annually from 2001 to 2019 (Figure S1). Hydropower now accounts for 31 percent of Bhutan’s exports (MoF 2024). Figure S1. Hydropower and Real GDP growth in Bhutan (percent), 1985-2023 30 Chhukha 25 20 Tala Mangdechhu (2007) (2019) 15 10 5 0 -5 -10 -15 GDP growth GDP growth, excluding electricity and water -20 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Source: World Bank staff calculations, based on data from the Ministry of Finance (MoF) and the National Statistics Bureau. Bhutan is renowned for its biodiversity conservation, guided by the GNH philosophy and a constitutional mandate to permanently maintain at least 60 percent forest cover. Between 2001 and 2022, forest cover increased from 65.7 to nearly 70 percent, with forests absorbing 6.8 million tonnes of carbon dioxide equivalent (MtCO2e) annually, more than double the nearly 3 MtCO2e emitted during 2011–20 (Figure S2). Bhutan reaffirmed its commitment to remain carbon neutral and pursue a low-emissions development pathway in its nationally determined contri- bution in support of the Paris Agreement, becoming one of the first Least Developed Countries (LDCs) to do so. With a considerable portion of labor dependent on agriculture and only a few sectors driving the growth of nonhy- dro industries, there is significant potential for Bhutan to accelerate its structural transformation. Between 2000 and 2022, agriculture’s GDP share fell from 27 to 13 percent, while services expanded from 40 to 52.5 percent, led by public administration, trade, transport, and the financial sector. Despite efforts to promote structural transformation, the shift from agriculture to industry or services has been slow, with the agricultural labor share declining by only 1 percentage point between 2005 and 2017. Nonhydro sector growth, driven mainly by services, construction, and ferro-alloy and ferro-silicon manufacturing, averaged 6.9 percent annually from 2001 and 2019. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 3 E x ecutive summary Figure S2. Greenhouse gas (GHG) emissions in Bhutan, 2000–20 a) Total and net emissions b) Sources of GHG emissions 6,000.0 100% 4,000.0 90% 2,000.0 80% Thousand Tonnes CO2e 70% 0.0 60% -2,000.0 50% -4,000.0 40% -6,000.0 30% -8,000.0 20% -10,000.0 10% -12,000.0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total Emission Excl. LULUC Sink Capacity Net emission / Removal Energy IPPU Agriculture Waste FOLU Source: RGoB 2022. Note: IPPU=Industrial Processes and Product Use. FOLU=Forestry and Other Land Use. LULUC=land use and land use change. Bhutan stands at a critical juncture as it confronts the escalating impacts of climate change, which threaten economic resilience and the livelihoods of its people. Strengthening adaptation across key sectors is essential, and Bhutan has prioritized this in its national strategies. It now faces two interrelated challenges: diversifying its economy and building resilience to climate change, as economic diversification supports climate adaptation, while stronger resilience enables a sustainable, green transition. Bhutan’s climate challenges Across the climate scenarios evaluated, annual average national temperatures in Bhutan are projected to rise through 2050, with precipitation also expected to increase under wet/warm scenarios.1 The climate model- ing conducted for this CCDR (IEc 2024) analyzed three dry/hot and three wet/warm climate scenarios to project a plausible range of changes in temperature and precipitation patterns through 2050. Under the dry/hot mean scenario, Bhutan’s national average temperature is projected to increase by 0.6°C and 1.1°C by the 2030s and the 2040s, respectively, compared to 1995–2020. The wet/warm mean scenario projects a smaller temperature increase (0.3˚C) by the 2020s, and similar warming levels by the 2040s. Average annual precipitation is expected to decline by 3 percent by the 2040s under dry/hot conditions and increase by 8 percent under wet/warm scenar- ios. Significant subnational and interannual variability means that individual years or locations may experience more extreme changes. 1 IEc (2024) obtained available climate scenarios from the World Bank’s Climate Change Knowledge Portal for 29 General Circulation Models (GCMs) from the Coupled Model Intercomparison Project 6 (CMIP6) suite of model outputs. Each GCM has up to five combinations of Shared Socioeconomic Pathway (SSP) and Representative Concentration Pathway (RCP) emissions scenario runs available. For each GCM-SSP combination, a modeled history from 1995 to 2014 and projections from 2015 to 2100 were available, for monthly mean temperature and precipitation at a 1x1 degree grid resolution. Given that GCM output is biased relative to observed climate conditions, bias correction and spatial disaggregation was conducted to a 0.5x0.5-degree resolution, before then inter- polating monthly variables to a daily timestep. The dry/hot scenarios are based around the 10th percentile of mean precipitation changes (dry) and the 90th percentile of mean temperature changes (hot), across SSP2–4.5 and SSP3–7.0 GCMs. The wet/warm scenarios are based around the 90th percentile of mean precipitation changes (wet) and the 10th percentile of mean temperature changes (warm), across SSP2–4.5 and SSP3–7.0 GCMs. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 4 E x ecutive summary Changes in river runoff will directly impact hydropower generation, given Bhutan’s reliance on run-of-river systems without large reservoir storage.2 Under the wet/warm mean scenario, hydropower generation is expected to increase by 1.6 percent by 2041–50, while the dry/hot mean scenario could reduce generation by 5.1 percent. From 2024 to 2034 (Figure S3), climate change is projected to reduce hydropower generation under both scenar- ios due to increased interannual variability in river runoff, with regional differences across river basins. Under the wet/warm mean climate scenario, average annual runoff is projected to increase across all basins by mid-cen- tury, with peak increases of up to 19 percent. In contrast, under the dry/hot mean scenario, runoff impacts are expected to be mostly negative.3 Figure S3. Projected hydropower generation change under climate scenarios, 2021–50 10% 0 -10% -20% 2020 2025 2030 2035 2040 2045 2050 Dry/Hot mean Wet/Warm mean Individual Dry GCMs Individual Wet GCMs Source: IEc 2024 Hydropower infrastructure in the Drangmechhu and Mangdechhu Basins is significantly vulnerable to pluvial flooding. Climate change is driving more frequent and severe storms in Bhutan, increasing the risk of overtopping and flood damage to hydropower infrastructure. Facilities, designed based on historical flood conditions, now face greater risks as storm intensity surpasses previous extremes. Flood depth increases primarily impact the Drang- mechhu and Mangdechhu Basins. Urban areas face increasing vulnerability to climate hazards, especially floods and landslides, due to rapid urban- ization. The urban population is expected to grow from 38 percent in 2017 to 57 percent in 2047, concentrating economic activity in urban centers. Between 1985 and 2015, built-up areas expanded by 135.4 percent, with flood-exposed areas increasing by 136.9 percent. About 20 percent of settlements are located in high flood risk zones. Cities like Dagana and Paro have expanded into these areas, increasing their vulnerability, while Thimphu, Samdrup Jongkhar, and Sarpang are expanding more slowly, but still encroaching on high-risk zones (Figure S4). By 2050, Bhutan’s cities are expected to experience more intense rainfall, higher temperatures, and prolonged dry periods. 2 Runoff is generated from precipitation, temperature, and evapotranspiration data, and then inputted into the Water Evaluation and Planning system (WEAP) model. 3 While a robust decision-making analysis is beyond the scope of this CCDR, an analysis of the runoff changes by basin across the full range of 55 SSP2–4.5 and SSP3–7.0 GCMs shows that the median projection runoff increases are expected to be more pronounced in Aiechhu and Nyera Amari, while median runoff in Drangmechhu is projected to decline slightly by 2050, relative to the historical baseline. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 5 E x ecutive summary Figure S4. Spatial growth and exposure to flood hazards in Bhutan’s cities 700 Slow-risky growth Fast-risky growth 600 Very high risk SE growth (%) 500 400 Paro Samdrupjongkhar 300 Haa Thimphu Pemagatshel Sarpang 200 Wangduephodrang Lhuentse Chhukha Monggar Samtse 100 Punakha Slow-safe growth Fast-safe growth Trashigang Zhemgang 0 0 100 200 300 400 500 600 700 Total SE growth (%) Slope line Average growth (Bhutan) Average growth (world) Source: World Bank staff calculations Note: For better visualization, the chart above excludes Dagana, which has a total growth of 2,485% and high-risk settlement growth of 5,330%. Key infrastructure increasingly faces exposure to climate-related natural hazards. Under climate change, capi- tal damage from flooding is projected to rise across the evaluated climate scenarios. In the SSP3–7.0 scenario, a 100-year flood could cause up to 5 percent more damage from both fluvial and pluvial flooding.4 Road linkages in central and northern Bhutan—particularly the East-West Highway—are critical for national connectivity, serving as the main transport artery linking districts. Bridge impacts vary across districts: in Thimphu, many are on unpaved secondary or tertiary roads and are built to 20 or 25-year design standards, making them more susceptible to damage and increasing cumulative repair costs, even during lower-intensity floods. In contrast, bridges in Chukha and Zhemgang, though fewer, are built on primary roads to a 50-year design standard. They are more resilient to low-intensity floods but incur higher reconstruction costs because of their larger span and width. Climate change poses growing risks to agriculture and tourism, while also creating new opportunities. Agricul- ture is increasingly threatened by erratic water availability, shifting agroecological zones, and pest outbreaks that heighten the risk of crop failure, particularly in the southern lowlands. Rural communities that rely on rainfed agri- culture are particularly vulnerable to altered seasonal patterns, such as heatwaves and droughts, exacerbating poverty and spatial inequality. The smallholder sector lacks effective coping strategies, limiting its ability to manage losses and recover from climate shocks. On the other hand, changing climatic conditions may allow for greater crop diversification at higher elevations, while milder winters present new opportunities for growth in tourism. Exposure to climate impacts and natural hazards is uneven across regions and districts. About 65 percent of the population (and 68 percent of the poor) are exposed to at least one natural hazard. Poverty and hazard risks often overlap, particularly in multi-hazard zones such as Zhemgang and Mongar in central and eastern regions near the southern border, where poor population faces higher risks. The expected annual population exposed metric, which accounts for both frequent and rare events,5 shows that flooding and heatwaves pose the most widespread risks, followed by landslides. Climate shocks are anticipated to significantly reduce Bhutan’s GDP by 2050, with dry/hot conditions likely to cause more severe disruptions than wet/warm conditions. The macroeconomic impact of climate shocks is 4 This increase is in addition to relatively sizeable damage already experienced under the historical baseline, especially from pluvial flooding. 5 Exposure estimates for multiple return periods and intensity thresholds are aggregated at levels of 197 gewogs corresponding to the 2022 poverty map. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 6 E x ecutive summary analyzed through five channels: changes in hydropower generation due to river runoff variations; alterations in rainfed and irrigated crop yields affecting crop revenues; damages from inland flooding; impacts on capital stock arising from road damage and increased maintenance; and bridge damage and maintenance issues due to recur- ring peak precipitation events, leading to fluvial flooding.6 Under a baseline macroeconomic scenario with limited diversification to new sectors, and minimal adaptive investments, dry/hot conditions result in a projected GDP decline of 3 percentage points by 2050,7 primarily due to the large impact on hydropower. While roads, bridges, and agriculture are also impacted, the economic impact is smaller (Figure S5a). By 2050, wet/warm conditions are also projected to lead to a decline in GDP , but to a much lesser extent than dry/hot conditions. Diversifying the economy and investing in adaptive infrastructure could significantly reduce projected GDP losses by 2050. In an alternative scenario where nonhydro industries and services play a larger economic role and agricul- ture’s share declines further, GDP losses by 2050 under dry/hot conditions are reduced by 1.2 percentage points (40 percent) compared to the baseline without explicit adaptive investments (Figure S5b). This scenario includes protective investments in roads and bridges, but not in hydropower, since few strategies can offset reduced river runoff resulting from water scarcity given the run-of-river nature of Bhutan’s hydropower facilities. Bhutan could offset the GDP losses from climate shocks more substantially than current estimates suggest by addressing addi- tional risks not included in the analysis, such as soil erosion in mountainous slopes and glacial lake outburst floods (GLOFs). The adaptive investments considered represent only a fraction of Bhutan’s total adaptative investment needs (estimated at $3.2 billion in its Long-term Low-emission Development Strategy). Investment in adaptation is also crucial as climate impacts are anticipated to intensify after 2050.8 Figure S5. Impact of selected climate shocks on GDP a) Baseline b) Alternative scenario (with adaptation) % GDP % GDP % GDP % GDP 2.0 2.0 2.0 2.0 1.0 1.0 1.0 1.0 0.0 0.0 0.0 0.0 -1.0 -1.0 -1.0 -1.0 -2.0 -2.0 -2.0 -2.0 -3.0 -3.0 -3.0 -3.0 -4.0 -4.0 -4.0 -4.0 2030 2040 2050 2030 2040 2050 -5.0 -5.0 -5.0 -5.0 rm rm rm m m m t t t t t t ho ho ho ho ho ho r r r Wa Wa Wa Wa Wa Wa y/ y/ y/ y/ y/ y/ Dr Dr Dr Dr Dr Dr t/ t/ t/ t/ t/ t/ We We We We We We o/w Bridges o/w Crops o/w Floods Fluvial Total GDP Impact o/w Hydropower o/w Roads o/w Floods Pluvial Source: World Bank staff calculations, based on climate model estimates from IEc 2024 6 Climate change-induced shocks are estimated using changes in variables, such as monthly precipitation and daily maximum temperature, projected up to 2050. These are then used in a macroeconomic model to estimate GDP effects under dry/hot and wet/warm scenarios. 7 Compared to a scenario that assumes no further climate change. 8 https://climateknowledgeportal.worldbank.org/country/bhutan/climate-data-projections. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 7 E x ecutive summary Tackling the twin challenges: diversifying growth while building resilience Transitioning to a greener, more diversified and resilient economy can support job creation in sustainable sectors. Although hydropower is a major contributor to Bhutan’s economy, it employs less than 1 percent of the workforce. Between 2018 and 2022, the share of cottage firms grew from 89 to 96 percent, while the average number of workers per firm dropped from 1.1 in 2019 to 0.7 in 2020 and 2021, signaling a decline in job oppor- tunities. Employment remains concentrated in agriculture (43 percent) and the public sector (19 percent). State- owned enterprises (SOEs) dominate several sectors, including finance. Small and medium-sized enterprises (SMEs) struggle with uneven access to credit, complex loan procedures, and limited banking options. The lack of diversification in, and small scale of, the private sector have constrained the growth of green jobs.9 Bhutan’s 13th Five-Year Plan notes that the private sector has been underperforming due to high production costs, limited infra- structure, outdated technology, and a shortage of skilled labor. To address this, it lays out priority areas to spur industrial development, including streamlining regulations, enhancing investment incentives, building strategic infrastructure to improve productivity and competitiveness (including industrial parks and dry ports), and continu- ing to support both traditional sectors—such as agriculture, hydropower, and tourism—and emerging sectors, such as the digital and creative economies. Building on the analytical framework of this CCDR (Figure S6), this report outlines steps to strengthen Bhutan’s resilience while accelerating economic diversification. Despite the emerging climate challenges, Bhutan can drive sustainable growth by leveraging its carbon-negative status and abundant natural resources. Key resilience-building measures include enhancing the spillovers of hydropower production to related sectors, raising agricultural productiv- ity through CSA adoption, and strengthening infrastructure to better support economic activity despite climate risks. Creating the conditions for sustainable green growth in forestry and tourism will support economic diversification and create opportunities for green job creation. The key enablers are harnessing innovative climate finance mech- anisms, strengthening institutional capacity, and empowering communities to drive locally-led climate adaptation. Figure S6. Analytical framework of the Bhutan CCDR Development achievements and climate impacts on economy and people Twin challenges: building climate resilience and diversifying economic growth Resilience in key Resilient Climate smart Resilient cities and productive sectors hydropower agriculture infrastructure Economic diversification Sustainable and green transition Jobs and skills Green tourism forestry Enablers Climate financing Governance and institutional capacity Recommendations to support Bhutan reach a resilient and green future 9 The CCDR uses the European Skills, Competencies, Qualifications, and Occupations (https://esco.ec.europa.eu) definition of green tasks to identify green jobs as those including the knowledge, abilities, values, and attitudes needed to live in, develop, and support a society that reduces the impact of human activity on the environment. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 8 E x ecutive summary Expanding hydropower potential presents opportunities to strengthen resilience against climate shocks and generate spillovers in other sectors. Bhutan uses only 9 percent of its feasible hydropower potential, and the government plans to significantly increase capacity by 2040. To ensure its infrastructure can withstand the inter- connected risks of the high mountain environment, Bhutan will need to undertake risk-informed planning and enhanced geohazard assessments, along with ongoing investment in resilient designs. Facilitating watershed reforestation, riparian zone restoration, and sedimentation management can reduce erosion, boost agricultural productivity, and improve forest conservation and use. Building climate resilience across other sectors, particularly agriculture, is equally important for protecting livelihoods, addressing climate impacts, and increasing productivity. Despite ongoing government initiatives, CSA adoption remains limited due to insufficient access to international markets, inadequate off-farm services such as transport and storage in strategic locations, unreliable water supply, and other persistent challenges. The 43 percent of the workforce that depends on primary production and a growing share of value-added activities remains vulnerable to climate shocks, drought, erratic rainfall, and other extreme events. Adopting drought-resis- tant crops, drip irrigation, soil conservation, and effective post-harvest techniques can mitigate climate impacts, curb GHG emissions, and enhance labor productivity. Overcoming the barriers to CSA adoption requires a combination of targeted public investment and increased private sector engagement. Scaling CSA requires dedicated public financing and stakeholder engagement to strengthen market systems, lower adoption risks, and ensure inclusive participation in value chains. The private sectors’ capacity to invest in CSA investment packages is constrained by high upfront costs of new technologies, limited access to quality inputs and advisory services, and uneven readiness across subsectors. Strategic public investments—in terrace consolidation, veterinary and extension services, post-harvest infrastructure, drip irriga- tion, and so on—are essential to create the enabling conditions for both on farm adaptation and private sector engagement. Disseminating CSA investment packages, increasing engagement with investors through platforms like the Bhutan Agricultural Trade Investment Forum, and expanding access to digital advisory services and conces- sional financing can further raise awareness, develop business plans around sustainability, and encourage on-farm experimentation, laying the foundation for climate-resilient agriculture. Bhutan also needs to enhance resilience in its urban centers, and this will require a paradigm shift toward risk-informed planning, decentralized implementation, and NBS. Although the National Adaptation Plan and 13th Five-Year Plan both recognize this imperative, implementation challenges persist at local level due to capacity constraints, limited financial resources, and the absence of robust data systems. Historical assessments show that pluvial flooding causes four times greater economic losses than fluvial flooding, and without adaptation, damages from a 100-year flood could increase by up to 5 percent by mid-century. Locating new infrastructure outside high- risk zones and retrofitting vulnerable structures can yield substantial benefits. Simulations show that structural adaptation could reduce capital losses by up to 90 percent for pluvial and 50 percent for fluvial flooding. Strategic land use planning—such as curbing low-density urban sprawl and regulating development in flood-prone areas— can mitigate disaster risks while enhancing agglomeration benefits. Urban forests, terracing, restoring streams, and other NBS offer a cost-effective way to complement conventional infrastructure while reducing vulnerability to floods, landslides, and heat stress. But despite their potential, the uptake of such solutions is limited. Invest- ments to modernize early warning systems (EWS), strengthen municipal coordination capacities, and improve digital infrastructure resilience are also crucial for timely and localized disaster response. The Gelephu Mindfulness City (GMC) initiative can demonstrate these principles in practice, offering a template for integrating climate resilience into urban planning as well as economic diversification and green job creation. Located in a climate-vulnerable region, the GMC model emphasizes ecological harmony by preserving wetlands, forests, and river corridors as natural buffers against floods and heatwaves. By combining climate-resilient infra- structure, agroforestry, and creative industries, GMC aims to establish new economic clusters offering replicable design principles and governance models for other towns in similar ecological and geographic contexts. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 9 E x ecutive summary Complementing this sustainable urbanization vision, Bhutan has a significant opportunity to drive inclusive and green growth by improving sustainable tourism, focusing on adventure, wellness, and ecotourism. Tourism is a vital economic engine in the country, accounting for 10 percent of GDP and nearly 17 percent of employment in 2019. Drawing primarily on the country’s cultural assets—86 percent of tourists come for cultural experiences— the sector is mostly concentrated in three districts (Paro, Thimphu, and Punakha). Expanding into underused segments, such as adventure and wellness tourism, can support green jobs and promote regional development. Investing in tourism-linked infrastructure, skills training, and developing less-visited areas can disperse visitor flows and preserve environmental integrity. The emerging wellness tourism segment, which aligns with Bhutan’s GNH philosophy, offers high revenue potential, with wellness tourists spending 41 percent more per trip than aver- age international travelers. To address the carbon footprint from tourism, especially transport, Bhutan can integrate electric vehicle (EV) adoption initiatives into a broader strategy covering adjacent policy issues. The country has started green- ing its transport sector, adopting an EV roadmap and supporting public charging infrastructure and taxi fleet conversion. Although this can reduce reliance on imported fuel and vulnerability to oil shocks, EV subsidies have opportunity costs and require complementary policies—such as expanding shared mobility and emissions stan- dards—for effective implementation. In 2014, a program to introduce EVs was unsuccessful due to high costs and limited infrastructure. Regulatory issues, such as EV battery recycling and waste management, also need addressing. A cost-effective multimodal approach, including shared mobility, e-bikes, walkable cities, and emis- sions standards for combustion engine vehicles, is essential to complement EV adoption and achieve transport decarbonization goals. Bhutan can further advance its climate and economic goals by unlocking sustainable opportunities in forest- based value chains. Increasing timber harvesting within sustainable limits and developing non-timber forest product (NTFP) value chains—especially bamboo, medicinal plants, furniture, and handicrafts—can increase the contribution of forests. NTFPs contribute less than 3 percent of income for rural households, much lower than in other forested countries, such as Indonesia (22 percent). Expanding the production and marketing of high- value NTFPs can provide significant income for rural communities, if paired with improved harvesting practices and research into domestication. Only about 5 percent of forests are used for commercial timber production. With growing demand for wood products, the sector could diversify into value-added products, such as furniture and handicrafts. By investing in technology to improve processing efficiency and product quality, Bhutan’s forest products could become more competitive globally, tapping into markets that value sustainable, organic, locally sourced goods. The private sector can complement public initiatives to expedite diversification and build resilience . It can play a crucial role in the following areas: • CSA: Introducing digital solutions and public-private partnerships can increase private sector engagement in service delivery. Although the public sector can take the lead in establishing climate-smart and green infrastructure to provide access to value-added, storage, and transport services at strategic locations to incentivize CSA, the private sector could efficiently and profitably manage these public infrastructures. It can also participate in the distribution, layout, and maintenance of smart irrigation systems. • Sustainable forestry: Bhutan can take several steps to create an enabling environment for forest-based SMEs through access to finance, technology, and skills development. Establishing clear policies that outline the roles and responsibilities of private entities in forestry and timber processing can create a comprehen- sive framework for private sector engagement. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 10 E x ecutive summary • Tourism: Private sector actors can develop wellness and adventure tourism circuits that build on and rein- force traditional practices while protecting the environment. Promoting ecotourism tied to forest conserva- tion could generate additional revenue while promoting sustainability. • Digital technologies to strengthen EWS and enhance the robustness of carbon credits: The private sector can play a key role in developing critical digital systems for communicating information through early warning and evacuation notices in disaster-affected areas. Combined with earth observation technologies, artificial intelligence, and machine learning, a digitized monitoring, reporting, and verification (MRV) system can play a crucial role in quantifying, monitoring, and verifying emissions reductions or removals. The private sector can help develop digital technologies to enhance the accuracy and robustness of MRV of carbon credits. Emerging green jobs in CSA, resilient infrastructure, tourism, and sustainable forestry can generate employ- ment opportunities while advancing environmental preservation. With green skills primarily concentrated in a few high-skilled managerial, professional, and technical positions, prioritizing skill development relevant to green industries and cultivating a supportive environment for green businesses can create more green jobs. Bhutan has a pool of unemployed, educated workers with engineering and business skills who could meet the rising demand with targeted training. For example, CSA initiatives can generate jobs in organic farming, agroforestry, and waste-to- energy; sustainable urbanization can boost employment in green construction and planning; and improving forest resource use can create demand for conservation, community forestry, and carbon credit management professionals. Enablers: climate finance and institutional strengthening Climate change presents risks to Bhutan’s financial system but also offers an opportunity to green and strengthen the sector. Bhutan is vulnerable to climate-induced physical and transition risks, which could under- mine financial stability. But institutions like the Royal Monetary Authority (RMA) and MoF are starting to address these challenges through policies such as the Green Finance Roadmap and national green taxonomy. Despite this progress, the financial system remains nascent, with limited products, risk management practices, and access to capital. Structural constraints, including weak credit systems and shallow capital markets, impede climate finance expansion. Risk-based lending practices are largely absent, collateral requirements remain rigid, and nonbanking financial institutions offer few alternatives, restricting the country’s capacity to finance green investments. As a result, Bhutan faces a widening gap between climate finance needs and available funding. National plans estimate that the country needs $7.7–14 billion by 2030 for climate mitigation and adaptation in the transport, infrastructure, agriculture, water management, and disaster risk reduction sectors. Current funding sources— primarily multilateral grants, official development assistance, and development banks—cover only a fraction of these needs. Although Bhutan has successfully accessed funding from the Green Climate Fund, Adaptation Fund, and Climate Investment Funds, private sector participation is minimal. With graduation from LDC status, conces- sional financing is expected to decrease, underscoring the urgent need to diversify and expand financial sources. Institutional and regulatory barriers have hindered private investment and the flow of foreign capital. Although recent initiatives—such as updating regulations to allow financial institutions to access external commercial borrowing—create an important channel for alternative financing sources, firms face multiple challenges in the investment climate. To facilitate foreign investment, further reforms could include eliminating the foreign ownership cap or reducing the minimum investment threshold; allowing the creation, enforcement, and perfection of security interest over immovable collateral for foreign lenders at par with domestic lenders; and developing a hedging and swap framework for foreign investors to manage foreign currency risks. But to close the climate financing gap, domestic financial ecosystems also need to be strengthened. Bhutan can do this through resource mobilization, by deepening its financial sector, and by strategically allocating concessional B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 11 E x ecutive summary finance. It can focus on strengthening public finance through better revenue collection and more efficient allocation of domestic resources; developing financial markets through improved supervision, broader product offerings, and risk-based pricing to attract institutional capital; and targeting resources to projects with high leverage potential and climate-development alignment. Carbon markets offer a source of additional nondebt revenue that Bhutan can use flexibly to overcome financing barriers. Global voluntary carbon markets grew rapidly to over $2 billion in 2021, but demand has since declined, amid concerns about credit quality. It is therefore important to balance participation in compliance and voluntary markets with further examination of the strategic role carbon markets play in facilitating green growth. Ongoing World Bank technical assistance for the Bhutan Climate Fund, which is expected to support the development of a carbon market strategy with market sounding to understand buyer preferences and assess credit quality, could help alleviate barriers to increased participation in these markets. Bhutan will also need to make more strategic use of domestic revenues, especially from hydropower. It spends more than half of its domestic revenues on public spending in the form of wages, goods, and services, rather than investments (World Bank 2024a).10 With the anticipated decline in official development assistance, the govern- ment will have to reallocate domestic resources, including revenue generated from hydropower exports and the proceeds from cryptocurrency, toward investments that facilitate domestic capital formation. Implementing a new fiscal strategy to reinvest hydro rents in productive capacity building in tradable sectors can ensure these reve- nues promote economic diversification. Operationalizing the Bhutan Economic Stabilization Fund—and the fiscal stabilization measures that regulate contributions to, and uses of, the fund—would smoothen volatile hydro reve- nues and public spending in the face of negative shocks. Fully integrating cryptocurrency operations into the macroeconomic framework would strengthen domestic reve- nue and economic management. Bhutan has ventured into cryptocurrency mining through Green Digital Limited and a joint venture with Bitdeer, a Singapore-based Nasdaq-listed company. Cryptocurrency investments may boost exports and revenue, though returns are uncertain due to Bitcoin’s volatility, and lower-than-expected returns from such operations could hinder the ability to repay the RMA loans taken out to finance them. Integrating all aspects of these operations into the macroeconomic framework would enable their impact on revenues and external balances to be monitored, reducing economic instability risks and supporting informed public investment and revenue decisions. To achieve its green growth and resilience goals, Bhutan must strengthen its institutional capacity for climate action. Although the country has a comprehensive climate governance framework, including the 2020 Environment Strategy and Climate Change Policy, there are gaps in implementation capacity, coordination mechanisms, and technical expertise. Institutional fragmentation persists, with overlapping responsibilities across ministries and agencies such as the National Environment Commission (NEC), Department of Environment and Climate Change (DECC), MoF, line ministries, and local government leading to duplication of efforts and inefficiencies. Assigning clearer roles and responsibilities is essential for improving sectoral integration for climate action. A dedicated climate change law would provide the additional legal backbone needed to enhance Bhutan’s climate governance and ensure long-term commitment to its environmental goals. Bhutan has constitutional provisions and environmental laws—such as the National Environment Protection Act—that integrate climate considerations, but it lacks a comprehensive climate change law, creating gaps in mandates, coordination, and enforcement. Global experience shows that framework climate legislation can strengthen institutional clarity, 10 Hydro rents have been absorbed by the economy through an increase in private and public consumption. Hydropower export revenues are transferred from the SOE Druk Green Power Corporation to central government as revenue in the form of corporate income tax, royalties, dividends, and profit transfers. A small fraction is transferred into the Bhutan Economic Stabilization Fund, and the majority is used as general government expenditure. A portion of the rents accrue to Druk Holding and Investments—the government’s commercial and investment arm—which uses some of it to cross-subsidize and invest in other SOEs. Both private and public consumption correlate positively with power exports and private investment. Imports demonstrate no correlation with power exports (World Bank 2024a). B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 12 E x ecutive summary continuity beyond political cycles, public engagement, and accountability for climate action. A Bhutan-specific climate law could establish clearer roles for national and local entities, formalize monitoring and evaluation mechanisms, promote climate-responsive budgeting, and enable greater private sector participation. Enacting such legislation would reinforce Bhutan’s regional leadership in climate action and create a strong foundation for sustaining carbon neutrality and resilience goals. To turn climate strategies into concrete action, Bhutan will need to strengthen climate-related domestic financ- ing and budgeting systems. Although it has made important strides on this front—such as integrating climate vulnerability criteria into local government resource allocations—financing remains insufficient to meet the coun- try’s climate objectives. NEC’s limited budget and under-execution rates, combined with a heavy reliance on exter- nal sources like the Green Climate Fund, highlight the urgent need to mobilize additional resources and improve domestic financing mechanisms. There is a need for institutional reforms to systematically integrate climate resil- ience into public financial management systems, track climate expenditures, and align national and local budgets with climate goals. SOEs, which dominate the energy and transport sectors, also need to systematically integrate climate risk assessments and resilience measures into their operations. Empowering communities to lead adaptation efforts is a cornerstone of Bhutan’s resilience strategy. Locally-led adaptation initiatives leverage community knowledge, address specific vulnerabilities, and build social capital essential for sustainable climate action. Programs such as the Local Climate Adaptive Living Facility demonstrate the potential of channeling climate finance to local governments through performance-based grants and incen- tivizing local ownership. However, to sustain gains beyond external funding cycles, Bhutan needs to institution- alize such mechanisms within its broader planning and fiscal frameworks. Investing in public awareness, CSA, green jobs training, and social safety nets will empower communities, enable adaptation and the diversification of livelihoods. Integrating Indigenous knowledge, particularly in the use of NBS, can enhance the effectiveness of adaptation initiatives. Finally, regional integration is essential for Bhutan to achieve climate-resilient growth. Integrating further with neighbors across South Asia would help diversify the economy, while also strengthening resilience across the region. This would involve tapping into regional energy markets through expanded hydropower trade, aligning tour- ism offerings with regional circuits, and collaborating on transboundary climate and environmental risks, including air pollution management. Bhutan is already pursuing stronger regional connectivity through physical, digital, and institutional initiatives. Continuing to do so can unlock new opportunities for youth, farmers, and entrepreneurs, while reinforcing its role as a steward of regional public goods, such as water, forests, and biodiversity. Policy recommendations To support Bhutan’s sustainable development goals and climate resilience ambitions, this report presents a set of priority policy recommendations aligned with the CCDR diagnostic. These are focused on four high-impact areas that are critical for Bhutan: enhancing climate resilience, diversifying the economy including creating green jobs, securing climate finance, and strengthening institutional capacity. By addressing these key areas, Bhutan can build on its development successes and navigate the challenges posed by climate change. The proposed actions are structured to align with Bhutan’s commitment to carbon neutrality and climate adaptation, recognizing the varying levels of readiness, resource requirements, and institutional reforms. This strategic approach ensures that Bhutan can sustainably manage its natural resources, foster economic growth, and improve the well-being of its people. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 13 E x ecutive summary Table S1. Summary of recommendations from this CCDR Area  Objective  Short-term actions   Medium-term actions   Long-term actions  Enhancing Strengthen Expand the hydro SOE Druk Adopt risk-based dam classification  Explore opportunities for climate resil- and diversify Green Power Corporation’s Develop standard operating proce- regional hydropower trade ience in key hydropower manpower and technical dures for GLOF monitoring  with Bangladesh, India, and sectors  resilience  capacity  Nepal Develop multipurpose water stor- Build strategic technical and age and watershed management Undertake watershed refor- financial partnerships for solutions  estation and sedimentation future hydropower projects  management  Improve procurement and risk management processes  Conduct advanced multi-haz- ard risk assessments for hydropower infrastructure  Facilitate CSA  Upgrade agricultural input Facilitate market access through Develop farm registry systems systems and reform policies aggregation and private sector for improved subsidy targeting  to facilitate import modern involvement Establish food safety and inputs  Strengthen cost-sharing mecha- traceability information Invest in adaptive agricultural nisms and concessional financing systems  research and innovation  for business plans incorporating CSA Expand commercial financ- Expand smart irrigation technologies  ing and credit access for CSA systems and digital extension Expand coverage of agricultural risk investments  services   mitigation tools to major climate Promote real-time farm events  advisories  Strengthen Integrate climate resilience Upgrade and deploy building codes Strengthen service deliv- urban criteria in urban and infra- for climate-resilient infrastructure ery through digitization and resilience  structure planning Invest in NBS for passive urban cool- improved operations and Densify land development in ing and flood protection  maintenance low-risk areas  Develop and operationalize Enhance emergency prepared- multi-hazard EWS in cities ness with urban resilience data Diversifying the Build green Develop targeted short-term Collaborate with educational insti- Continuously update labor economy and skills  and on-the-job green skills tutions and industries to offer market information systems to creating green training programs for youth formal green skills certifications and align green workforce supply jobs  and low-skilled workers  courses  with demand through periodic assessments  Develop green Enhance branding and protec- Expand adventure and wellness tour- — tourism  tion of cultural heritage sites  ism activities integrated with conser- Manage visitor pressure on vation goals  sensitive sites through caps Promote ecotourism in protected and site management plans  areas with climate resilience considerations  Promote Strengthen sustainable forest Reform forest policies to balance — sustainable management practices, conservation and sustainable use  forestry  including thinning opera- Expand NTFP and value-added wood tions and upgrading forestry industries  equipment  Improve market access through Expand community forestry branding and certification  programs  B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 14 E x ecutive summary Area  Objective  Short-term actions   Medium-term actions   Long-term actions  Securing Finance Develop and pilot public-pri- Securitize future hydropower export Expand the use of credit climate finance  hydropower vate partnership models for earnings  enhancement instruments expansion  new hydropower projects  Develop portfolio-level financing (e.g., guarantees, insurance)  solutions to attract private investors  Leverage climate finance through carbon markets  Better utiliza- Outline a new fiscal strategy Strengthen budget tagging for — tion of domes- with a long-term vision to climate mitigation and adaptation tic resources channel a share of hydro reve- nue for capital formation and productive capacity building in the economy Strengthen city Modernize local tax collection Improve property market transpar- — finance  systems to improve efficiency ency through updated property valu- Introduce digital public ations and cadastral systems  services for better citizen engagement  Unlock forestry — Strengthen MRV systems for forestry Develop carbon-linked finan- carbon finance  carbon credits and align with inter- cial instruments (e.g. carbon national standards  bonds)  Allocate green tax revenues specifically to conservation investments  Expand green Expand financial literacy and Shift toward risk-based lending Develop sovereign green bond finance digital inclusion initiatives  practices  frameworks  instruments  Optimize concessional finance Implement the Green Finance Establish blended finance for climate projects  Roadmap  models to attract private Expand corporate social Increase carbon market participation investment in climate-resilient responsibility financing  through strategic planning  sectors  Strengthening Strengthen Revive and institutionalize Clarify agency mandates for climate Enact a comprehensive institutions for climate multisectoral coordination action  climate change law  climate action  governance  groups and ensure regular Empower NEC and DECC by provid- meetings to integrate climate ing sufficient budget and staffing  priorities into national and local planning processes  Improve Operationalize the Bhutan Introduce physical and transitional Develop a digital MRV plat- transparency  Climate Change Platform for climate risks reporting for SOEs  form for climate action public transparency  tracking  Conduct systematic climate   risk assessments for planning  B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 15 1. BHUTAN’S DEVELOPMENT ACHIEVEMENTS, CLIMATE CHALLENGES, AND OPPORTUNITIES B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 16 1 . B hutan’ s development achievements, climate challenges, and opportunities 1.1. Developmental and environmental achievements Bhutan has achieved steady growth and poverty alleviation over the last 20 years. A small landlocked country in the eastern Himalayas, it shares borders with India to the south and east and China to the north. Over 2000–22, the country’s gross domestic product (GDP) and per capita GDP grew at 6.6 and 5.1 percent per year in real terms, respectively, excluding 2020 due to pervasive disruptions to economic activity caused by COVID-19 (Figure 1). By 2022, gross national income per capita reached $3,600, positioning Bhutan near the World Bank’s threshold of $4,516 required for upper-middle-income classification (World Bank 2024a). The country has almost eradicated extreme poverty, defined as people living on less than $2.15 per day. The proportion of the population living below the upper-middle-income poverty line of $6.85 per day declined to 6 percent in 2025 from 8.4 percent in 2022, despite the adversities brought on by COVID-19, during which Bhutan maintained one of the region’s lowest infec- tion rates. Poverty reduction was more salient in rural areas. Driven by significant improvements in nonmonetary well-being dimensions, such as education and sanitation, Bhutan has steadily improved its human development outcomes. Hydropower revenue has played a crucial role in enhancing education, health care, and access to essential utilities. With almost universal enrollment in primary education, Bhutan’s literacy rates have risen from 53 percent in 2005 to 70.6 percent in 2022. It also achieved universal electricity access in 2019, near universal access to piped water by 2022, and about 88 percent of the population had access to clean fuel technologies in 2022, up from just 26.2 percent in 2000. As a result, Bhutan has registered a high increase in the United Nations’ Human Development Index over the past decades (Figure 2). These achievements are remarkable, considering the logistical difficulties presented by the mountainous terrain and dispersed population, which increase the costs of delivering public services. Figure 1. Growth in average real per-capita GDP in Figure 2. Change in Human Development Index South Asian countries, percent, 2000–22 (percent) value in South Asian countries, 2010–22 6.0 0.12 0.11 5.2 5.1 4.8 0.10 5.0 4.6 0.10 4.0 3.8 3.6 0.08 0.07 0.07 0.06 3.0 2.4 0.06 0.05 0.04 2.0 1.5 0.04 1.0 0.02 0.01 0.0 0.00 ia an h s ka l an an sh an ia s l ka n an pa pa ve ve es ta Ind Ind e an an ut ist ist ut ist Ne Ne ldi ldi kis lad lad Bh Bh k an an iL iL Ma Ma Pa Pa ng ng Sr Sr gh gh Ba Ba Af Af Source: World Bank staff calculations, based on data from World Development Indicators. Bhutan has harnessed its clean and renewable hydropower potential to power its economy. Capitalizing on its mountainous topography and abundant water resources, the country has significantly expanded its hydroelectric power sector since the mid-1980s, with substantial support from India. Today, it produces nearly all its electricity with hydropower, a clean and renewable energy source that does not emit carbon dioxide and provides additional benefits by regulating water to mitigate floods, alleviating drought conditions, supporting irrigation, and even B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 17 1 . B hutan’ s development achievements, climate challenges, and opportunities providing a potential tourist attraction. The hydropower sector has been a key driver of economic growth, with real GDP growth averaging 7 percent during 2001–19.11 Historically, periods of high growth have coincided with large projects being commissioned (Figure 3). But the annual average growth of the electricity and water component of GDP was significantly higher during 2001–08, at 21.7 percent, compared to only 0.5 percent during 2010–23, excluding 2020 and 2021. About 31 percent of Bhutan’s exports are derived from the hydropower sector (DRC 2024). Since the first hydropower project was commissioned in Chukha in 1987, installed hydropower capacity has grown more than sevenfold to 2,453 megawatts (MW) in 2024. Figure 3. Hydropower and Real GDP growth in Bhutan (percent), 1985-2023 30 Chhukha 25 20 Tala (2007) 15 Mangdechhu 10 (2019) 5 0 -5 -10 -15 GDP growth GDP growth, excluding electricity and water -20 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Source: World Bank staff calculations, based on data from the Ministry of Finance (MoF) and the National Statistics Bureau (NSB). Bhutan’s conservation efforts are globally recognized, and nearly 70 percent of the country is under forest cover. A high-forest, low-deforestation country, it is widely known for biodiversity conservation, as embodied in its Gross National Happiness (GNH) philosophy and the constitutional requirement that a minimum of 60 percent of the country be perpetually covered by forests. Its effective forest conservation framework has increased forest cover in the last decades, from 65.7 percent in 2001 to nearly 70 percent in 2022. Its forests make Bhutan one of the world’s major biodiversity hotspots, and 64 percent of its forest area is categorized as ‘very dense’. Due to persistent conservation efforts, it has one of the world’s highest per capita shares of renewable natural capital (World Bank 2024g),12 uniquely placing it to generate economic opportunities through effective natural resource management practices. But with sustained growth, deforestation has increased over the past decade (FAO 2020). With only 5 percent of the forest area under management for economic purposes, the sector’s contribution to the economy is limited: forests account for 3 percent of household incomes, compared to the emerging markets and developing economies average of 22 percent. Bhutan’s natural wealth has transformed it into a carbon-negative country. As of 2020, around 2.7 million tonnes of carbon dioxide equivalent (MtCO2e) are emitted annually by sectors excluding forests. Although average green- house gas (GHG) emissions have increased over the past decade—from 1.9 MtCO2e in 2000–10 to nearly 3 MtCO2e during 2011–20—the country’s forests sequester 6.8 MtCO2e annually (Figure 4), making Bhutan one of the world’s few carbon-negative countries. In its nationally determined contribution (NDC) submitted to the 21st 11 The country has made a robust recovery from the pandemic, accompanied by some downside risks. The fiscal deficit has fluctuated in recent years, from 4.7% of GDP in FY22/23, narrowing to 0.2% in FY23/24. External debt has also increased, mostly linked to hydropower project loans from India. International reserves remain low but have begun to stabilize, increasing significantly to $861 million in February 2025. The Bhutanese ngultrum is pegged one-to-one to the Indian rupee. While this offers a degree of stability considering India’s significance as a trading partner, it also makes the country vulnerable to changes in the Indian economy. 12 More than 50% of Bhutan’s renewable natural capital is derived from protected areas, and the rest is sourced from forests and ecosystem services, agricul- tural and pasture lands, and minerals. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 18 1 . B hutan’ s development achievements, climate challenges, and opportunities Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC), Bhutan reaf- firmed its commitment to remaining carbon neutral and pursuing a low-emission development pathway in support of its commitments of the Paris Agreement. It was also one of the first Least Developed Countries (LDCs) to submit a long-term low-emission development strategy (LTS) to the UNFCCC. Figure 4. GHG emissions in Bhutan, 2000–20 a) GHG emissions b) Sources of GHG emissions 6,000.0 100% 4,000.0 2925.6 90% 1984.2 2,000.0 80% Thousand Tonnes CO2e 70% 0.0 60% -2,000.0 50% -4,000.0 40% -6,000.0 30% -8,000.0 20% -10,000.0 10% -12,000.0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total Emission Excl. LULUC Sink Capacity Net emission / Removal Energy IPPU Agriculture Waste FOLU Source: RGoB 2022. Bhutan has consistently positioned itself as a global leader in environmental sustainability, committing to remain carbon neutral as part of its development strategy. Its 2008 constitution reflects this commitment, mandating that at least 60 percent of the country’s land must remain under forest cover in perpetuity. The GNH principle under- pins Bhutan’s development approach, emphasizing environmental conservation alongside economic and social well-being. Article 5 of the constitution further enshrines the protection and sustainable use of natural resources, making climate change adaptation and mitigation integral components of national policy. Having committed to carbon neutrality during the 15th United Nations Biodiversity Conference in 2009 when it was still an LDC, Bhutan is rapidly integrating this vision into its development initiatives (Box 1). 1.2. Climate risks and implications for the economy and people Climate risks Bhutan has a diverse climate, shaped by monsoon influences and regional variations. The Köppen-Geiger climate classification system, which categorizes climates based on temperature and precipitation patterns, provides a useful framework for understanding this diversity. With three distinct zones, Bhutan’s topography plays a key role in its climatic variability. The Great Himalayas in the north, with high peaks reaching up to 24,000 feet, have a relatively dry climate (Suny, Dowsett and Howe 2024); the Lesser Himalayas in the center, characterized by alpine vegetation and forests, have moderate rainfall; and the Duars Plain in the south, with its semitropical forests, has heavy rainfall. Most of the country experiences a monsoon-influenced temperate oceanic (Cwb) climate, char- acterized by cool temperatures, wet summers, and dry winters. In the north, monsoon-influenced warm-summer humid continental (Dwb) and tundra (ET) climates dominate. The Dwb climate features relatively dry winters and wet summers, with warmer temperatures than Cwb, while the ET climate is characterized by cool temperatures B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 19 1 . B hutan’ s development achievements, climate challenges, and opportunities BOX 1. KEY POLICIES AND FRAMEWORKS THAT REFLECT BHUTAN’S CLIMATE CHANGE COMMITMENTS Bhutan has a robust framework that focuses on environmental protection, and climate change is a policy priority. One of the key legislative frameworks supporting the country’s climate goals is the National Environment Protection Act (NEPA) of 2007, which lays the foundation for sustainable development by promoting the precautionary prin- ciple, the “polluter pays” principle, and public participation in environmental decision-making. The 2020 Climate Change Policy, while not a standalone legal document, offers strategic guidance for maintaining carbon neutrality and building resilience to climate impacts, highlighting the importance of integrating climate change across all sectors and levels of government. The 13th Five-Year Plan (FYP) (2024–29) aligns with Bhutan’s long-term vision of sustainable development and includes dedicated programs to address ecological diversity and climate resilience. Bhutan’s overall climate change strategy emphasizes decoupling GHG emissions from economic growth by expanding renewable energy, particularly hydropower, and adopting climate-smart agriculture (CSA), integrated water management, and other measures. But despite this comprehensive policy framework, implementation challenges persist, particularly at local government level, where capacity and technical expertise are limited. Bhutan has demonstrated a strong commitment to medium- and long-term climate change planning through key strategies. These include its national adaptation plan (NAP), LTS, and NDCs. The NAP , issued in 2023, outlines Bhutan’s medium-term adaptation priorities in the water, agriculture, and forestry sectors to enhance resilience to climate impacts. It builds on the country’s earlier adaptation experiences and aligns with national policies to inte- grate climate adaptation into long-term development planning. Bhutan’s NDCs—submitted in 2009 and 2021— commit the country to remaining carbon-neutral, providing sectoral targets and data-driven strategies to manage climate risks, focusing on sustainable energy, forest conservation, and adaptation. The LTS, submitted in 2023, sets Bhutan’s vision for maintaining carbon neutrality while decoupling GHG emissions from economic growth. It identifies energy, transport, and industry as key sectors for emissions reduction targets and outlines mitigation and adaptation measures to be achieved by 2050. The LTS is part of Bhutan’s broader goal of transforming into a climate-resilient, sustainable economy. year-round, averaging 0–10°C (Oregon State University 2024). The south has a monsoon-influenced humid tropi- cal (Cwa) climate, marked by mild winters and hot summers. Bhutan receives most of its precipitation from June through September during the monsoon season, with precipitation generally highest in the south. With high vulnerability to natural hazards and climate change, a focus on adaptation and building resilience is vital. The country’s complex topography, steep gradients, and the distinct climatic patterns of the Himalayas increase the risk of riverine floods, intense rainfall events, glacial lake outburst floods (GLOFs), landslides, extreme heat, and forest fires.13 Climate change has the potential to further amplify many of these risks. 13 https://www.thinkhazard.org/en/report/31-bhutan. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 20 1 . B hutan’ s development achievements, climate challenges, and opportunities Climate change scenario modeling conducted for this Country Climate and Development Report (CCDR) demon- strates that, across all scenarios evaluated, average annual temperatures are likely to increase in each decade relative to baseline conditions (Figure 5).14 The modeling uses three dry/hot and three wet/warm scenarios, based on changes between the baseline (observed data over 1995–2020) and 2051–60. The dry/hot scenarios are based around the 10th percentile of mean precipitation changes (dry) and the 90th percentile of mean temperature changes (hot), across SSP2–4.5 and SSP3–7.0 GCMs. The wet/warm scenarios are based around the 90th percentile of mean precipitation changes (wet) and the 10th percentile in mean temperature changes (warm), across SSP2–4.5 and SSP3–7.0 GCMs. Projected changes in temperature are relatively uniform across the country under all the dry/ hot scenarios, though some predict hotter conditions in northern regions. Spatial variability is also minimal under wet/warm scenarios, with most regions experiencing temperature increases up to 1.2˚C relative to the baseline. The increase in average national temperature under the dry/hot mean is expected to be 0.6˚C by the end of the decade, and 1.11˚C by the 2040s, relative to the baseline. The wet/warm mean scenario projects a lower increase—of 0.3˚C by 2030—but achieves broadly similar temperature increases as the dry/hot mean by the 2040s (Table 1). Figure 5. Temperature change trajectories by climate scenario 1.5 Change in Temperature (°C) 1.0 0.5 0.0 2020 2030 2040 2050 SSP 2-4.5 GFDL-ESM4 SSP 2-4.5 MIROC6 SSP 3-7.0 MIROC6 SSP 3-7.0 INM-CM5-0 SSP2-4.5 CMCC-CM2-SR5 SSP 2-4.5 CMCC-ESM2 Source: IEC 2024. Under the dry/hot scenarios, varied trends in precipitation are expected across Bhutan during 2041–50. Under some dry/hot GCMs, a decrease in rainfall is expected across the country, while others predict potential wetting in the east. Under the wet/warm scenarios, generally wetter conditions are expected across the country, with individ- ual GCMs differing in terms of which areas will experience the greatest increases in precipitation. Average national precipitation in the 2040s is expected to be 3 percent lower than the baseline under the dry/hot mean scenario, and 8 percent higher than the baseline under the wet/warm mean scenario (Table 1). National average annual precipitation is generally expected to increase by decade under the wet/warm mean and decrease by decade under the dry/hot mean, though significant subnational and interannual variability mean that individual years or locations may experience more sizeable changes than suggested by these average values (Figure 6). Box 2 provides a comparison of the climate projections of this CCDR with those published by the National Centre for Hydrology and Meteorology (NCHM) in 2024. 14 IEc (2024) obtained available climate scenarios from the World Bank’s Climate Change Knowledge Portal for 29 General Circulation Models (GCMs) from the Coupled Model Intercomparison Project 6 (CMIP6) suite of model outputs. Each GCM has up to five combinations of Shared Socioeconomic Pathway (SSP) and Representative Concentration Pathway (RCP) emissions scenario runs available. For each GCM-SSP combination, a modeled history from 1995 to 2014 and projections from 2015 to 2100 were available, for monthly mean temperature and precipitation at a 1x1-degree grid resolution. Given that GCM output is biased relative to observed climate conditions, bias-correction and spatial disaggregation was conducted to a 0.5x0.5-degree resolution, before then interpo- lating monthly variables to a daily timestep. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 21 1 . B hutan’ s development achievements, climate challenges, and opportunities Figure 6. Precipitation change trajectories by climate scenario 30% Percent change in precipitation (%) 20% 10% 0 -10% 2020 2030 2040 2050 SSP 2-4.5 GFDL-ESM4 SSP 2-4.5 MIROC6 SSP 3-7.0 MIROC6 SSP 3-7.0 INM-CM5-0 SSP2-4.5 CMCC-CM2-SR5 SSP 2-4.5 CMCC-ESM2 Source: IEC 2024 Table 1. Changes in average national temperature and precipitation under mean scenarios, relative to baseline Scenario 2020s 2030s 2040s Temperature (˚C) Dry/Hot mean +0.60 +0.80 +1.11 Wet/Warm mean +0.30 +0.76 +1.13 Precipitation (%) Dry/hot mean -2 -3 -3 Wet/warm mean +1 +10 +8 Source: IEc 2024. The “twin challenge” of building resilience while diversifying growth Bhutan’s natural resources—including water, forests, and biodiversity—are at high risk from climate change. In Bhutan, water is both abundant and crucial for agriculture and hydropower. Forests are home to diverse species and provide valuable resources, such as timber and nonwood forest products. They also play a vital role in storing water and contribute to carbon neutrality. But climate change poses a serious threat to forests and biodiversity, disrupting habitats and ecosystems. Forest fires, driven by warmer and drier conditions during the dry season, are among the most significant threats, jeopardizing biodiversity, human settlements, cultural sites, and Bhutan’s status as a carbon sink. Climate change exposes the energy, agriculture, tourism, and infrastructure sectors to risks; but it can also present new opportunities. Hydropower plant infrastructure and power generation are both exposed to a range of risks, including GLOFs, rising temperatures, extreme rainfall patterns, and melting glaciers. Plants that incorporate B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 22 1 . B hutan’ s development achievements, climate challenges, and opportunities Box 2. Climate change projections for Bhutan This box compares climate change projections developed by the Royal Government of Bhutan’s (RGoB) NCHM in its climate change projection report with those in the climate scenarios used in this CCDR. The NCHM explores future climate trends based on global models and different SSP scenarios, examining how temperature, precip- itation patterns, and extreme weather might change under different emission scenarios, to guide the country’s national adaptation planning efforts. Climate scenario selection process: The NCHM study focuses on CMIP6 projections for SSP1–2.6, SSP2–4.5, and SSP3-7.0 for 2021–2100. Downscaling and bias-correcting projections from 10 different climate models, the study presents projected temperatures and precipitation averaged across all 10 models, for each SSP . Consis- tent with the approach taken in other CCDRs, the scenario selection process used in this CCDR selects individual GCMs from SSP2–4.5 and SSP3–7.0 to capture the broadest range of climate change effects across GCMs from 2021–50. This is done by selecting representative scenarios that span the range of projected possible changes in temperature and precipitation (appendix A). Projected changes in temperature: Both studies project temperatures to increase under climate change over the coming decades, with larger increases projected in northern regions of the country. Projected changes in precipitation: The NCHM report finds that both seasonal and annual precipitation is likely to increase across Bhutan by 2100, particularly under higher emissions scenarios, with certain regions (partic- ularly in the east and south-east) possibly experiencing decreased precipitation by 2060. The CCDR anticipates substantial precipitation increases under wet/warm climate scenarios (up to 8 percent, on average, by 2050), with smaller reductions in precipitation possible under dry/hot scenarios (up to -3 percent, on average, by 2050). These differences partly result from the differences in scenario selection processes. Projected changes in the seasonality of precipitation: Although the NCHM expects minimal changes in the season- ality of precipitation, it finds that the wettest months are likely to become even wetter. It also finds some small changes in winter precipitation, with increased winter precipitation under SSP1–2.6 and 2–4.5, with decreases in the west under SSP3–7.0. These projections are largely in line with the findings of this CCDR, which indicate relatively minor changes in winter precipitation and more significant increases (under wet/warm scenarios) and decreases (dry/hot scenarios) during the monsoon months. Projected changes in glacial runoff: The assessment of glacial runoff impacts relies on older CMIP5 projections for more pessimistic emissions scenarios, specifically RCP2.6, RCP4.5 and RCP8.5. The NCHM report finds that all basins with glacial contributions are likely to experience declines in glacial runoff by 2040. In most cases, the reductions are expected to be no greater than 25 percent, except for the Drangmechhu Basin, where they will be higher. But glacial runoff remains a relatively small contributor to total runoff. This CCDR expands on the findings of Beldring and Vokso (2012) and Wilson et al. (2011), which indicate that the contribution of glacial melt to stream- flow will remain relatively stable in the first half of the century but is expected to change significantly after 2050. Sectoral impacts of climate change: The NCHM does not provide an in-depth assessment of the impacts of climate change on specific sectors. Rather, it offers examples to illustrate the exposure of various sectors and regions to changes in climate variables. Source: IEc 2024; NCHM 2024. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 23 1 . B hutan’ s development achievements, climate challenges, and opportunities resilient measures can protect the country from shocks, including those resulting from climate change. Although uncertain water availability, shifting agricultural zones, and increased exposure to pests and diseases could lead to decreasing productivity and crop failure in the southern lowlands, they can also offer opportunities for crop diversification at higher elevations. Similarly, while climate change can negatively affect landscapes and tourism infrastructure, it could also extend tourism seasons due to milder winters, presenting new opportunities for the sector. Landslides and flash floods can disrupt the fragile transportation network and impact connectivity and trade. As global climate patterns continue to evolve, infrastructure that is designed based on historical climate data may lack the resilience needed to withstand current and future climate stresses. This CCDR analyzes Bhutan’s economic vulnerability to climate shocks under different climate scenarios for two economic development pathways: a baseline scenario and an alternative. In the baseline scenario, the economy is assumed to experience limited economic diversification into new sectors. In the alternative scenario, it is assumed to have diversified more, with non-hydro industries and services providing a larger share of gross value added. The climate-induced shocks to the economy under the dry/hot and wet/warm mean climate scenarios are analyzed through five channels: changes in hydropower generation due to variations in river runoff; alterations in rainfed and irrigated crop yields affecting crop revenue; damages from inland flooding; impacts on capital stock from road damage and increased maintenance; and bridge damage and maintenance issues due to recurring peak precipitation events, leading to fluvial flooding. The analysis does not account for additional impact channels—such as soil erosion in mountainous agriculture and GLOFs affecting infrastructure—as these are difficult to capture in biophysical models.15 Even in Bhutan, where baseline temperatures are relatively low, climate risks can hinder development gains, especially in dry/hot scenarios. Figure 7 illustrates the estimated impact of climate-related shocks on GDP , in real terms and compared to a scenario of no further climate change, without explicitly considering adaptative invest- ments. By 2040, wet/warm conditions are estimated to increase GDP by 0.8 percentage points in the baseline scenario, primarily due to a positive impact on hydropower production, while dry/hot conditions result in a decline of 0.7 percentage points in both scenarios. Hydropower production is the most affected under dry/hot conditions, Figure 7. Impact of climate shocks on GDP a) Baseline b) Alternative % GDP % GDP % GDP % GDP 2.0 2.0 2.0 2.0 1.0 1.0 1.0 1.0 0.0 0.0 0.0 0.0 -1.0 -1.0 -1.0 -1.0 -2.0 -2.0 -2.0 -2.0 -3.0 -3.0 -3.0 -3.0 -4.0 -4.0 -4.0 -4.0 2030 2040 2050 2030 2040 2050 -5.0 -5.0 -5.0 -5.0 rm rm rm m m rm t t t t t t ho ho ho ho ho ho r r Wa Wa Wa Wa Wa Wa y/ y/ y/ y/ y/ y/ Dr Dr Dr Dr Dr Dr t/ t/ t/ t/ t/ t/ We We We We We We o/w Bridges o/w Crops o/w Floods Fluvial Total GDP Impact o/w Hydropower o/w Roads o/w Floods Pluvial Source: World Bank staff calculations based on climate model estimates from IEc 2024. 15 Climate change-induced shocks are assessed using projected changes in climate variables—such as monthly precipitation and daily maximum temperature— up to 2050 in a macroeconomic model to estimate aggregate GDP effects under dry/hot and wet/warm scenarios. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 24 1 . B hutan’ s development achievements, climate challenges, and opportunities while pluvial floods pose significant risks to road infrastructure. Rainfed crop production also remains vulnerable under a drier climate, but much less so than hydropower. By 2050, GDP declines by 3 percentage points under dry/hot conditions in the baseline scenario and registers a less severe decline of 2.2 percentage points in the alternative scenario, when the economy is less reliant on hydropower. By the 2050s, the impact on GDP is also negative under wet/warm conditions, albeit much lower in magnitude compared to dry/hot conditions. This is primarily driven by damage resulting from pluvial floods. Economic diversification, coupled with adaptative investments, can significantly reduce climate-induced losses by 2050. Figure 9 illustrates the estimated impacts of adaptive investments to protect roads and bridges from flood damage. The analysis does not consider investments to mitigate the impact of climate change on hydropower production, because, although there are tailored strategies to address increased runoff, few of these can offset reduced river runoff from water scarcity, given the run-of-river nature of Bhutan’s hydropower facilities. By 2040, even with the limited adaptative investments considered, dry/hot conditions are projected to result in a lower (0.4 percentage point) decline in GDP under both the baseline and alternative scenarios. The difference between the baseline scenario without adaptation (Figure 7a) and the alternative with adaptation (Figure 8b) is more apparent by 2050, when the decline in GDP is 1.2 percentage points lower than the baseline without adaptation. Diversi- fication with adaptive investments offsets 40 percent of the GDP losses projected under the baseline scenario without explicit adaptative investments. The macroeconomic implications of the baseline and alternative scenar- ios with adaptive investments are detailed in Appendix B. Figure 8. Impact of climate shocks on GDP with adaptation a) Baseline b) Alternative % GDP % GDP % GDP % GDP 2.0 2.0 2.0 2.0 1.0 1.0 1.0 1.0 0.0 0.0 0.0 0.0 -1.0 -1.0 -1.0 -1.0 -2.0 -2.0 -2.0 -2.0 -3.0 -3.0 -3.0 -3.0 -4.0 -4.0 -4.0 -4.0 2030 2040 2050 2030 2040 2050 -5.0 -5.0 -5.0 -5.0 rm rm rm m m m t t t t t t ho ho ho ho ho ho r r r Wa Wa Wa Wa Wa Wa y/ y/ y/ y/ y/ y/ Dr Dr Dr Dr Dr Dr t/ t/ t/ t/ t/ t/ We We We We We We o/w Bridges o/w Crops o/w Floods Fluvial Total GDP Impact o/w Hydropower o/w Roads o/w Floods Pluvial Source: World Bank staff calculations, based on climate model estimates from IEc 2024. There is a strong case for Bhutan to undertake adaptive investments, as climate impacts are expected to worsen after 2050.16 Although the adaptive investments considered in the model are only a fraction of the adap- tation investment need of $3.2 billion as estimated in Bhutan’s LTS, the results suggest that the country could offset much of the GDP decline caused by climate shocks by undertaking investments to address climate impacts that are not included in this analysis, such as soil erosion in mountainous slopes, which affects both agriculture 16 https://climateknowledgeportal.worldbank.org/. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 25 1 . B hutan’ s development achievements, climate challenges, and opportunities and GLOFs. In view of the difficulties of mitigating the effects of reduced river runoffs on hydropower, diversifying the energy mix to include solar and geothermal energy could reduce risks associated with changes in hydrology. Advancing economic diversification and building resilience can also create jobs. While hydropower contributes significantly to the economy, with less than 1 percent of the workforce employed in the sector, it has potential to create more jobs. Nonhydro industry accounts for 19 percent of GDP . This mainly comprises ferroalloy and ferro- silicon construction and manufacturing, and a substantial share of other manufacturing takes place in cottage industries and artisanal establishments. Structural transformation has been slow; so, employment remains concen- trated in agriculture (43 percent) and the public sector (19 percent). Unemployment increased from an average of 2.8 percent in 2015–19 to 3.1 percent in 2024, with youth unemployment at 17.7 percent (NSB 2022). A scarcity of high-wage, high-skilled jobs and a lack of productive jobs that can meet the wage expectations of the educated labor force (Alaref et al. 2024) has contributed to a large outmigration among the most skilled in recent years, including those in the public sector. As Bhutan diversifies into new sectors and undertakes adaptative investments to build resilience again climate-induced shocks, it can take advantage of this significant untapped potential to use green skills in civil engineering, renewable energy, water supply and sewerage, construction, transportation, and other key occupations (section 3.4). Implications for people and poverty reduction Multiple climate hazards are expected to impact Bhutan’s economy and people. Historical data indicate that Bhutan is ranked highest among small states (defined as those with populations of 1.5 million or less) for natural disaster death tolls and by disaster-related economic losses as a percentage of GDP from 1994 to 2013 (Figure 9). Figure 9. Small states most affected by deaths and economic losses related to natural disasters, 1994–2013 a) Natural disaster death tolls b) Disaster-related economic losses Bhutan 263 Bhutan 79.4 Djibouti 196 Djibouti 74.8 Luxembourg 170 Luxembourg 45.9 Samoa 165 Samoa 43.9 Vanuatu Vanuatu 148 43.7 0 50 100 150 200 250 300 0 10 20 30 40 50 60 70 80 Source: Centre for Research on the Epidemiology of Disasters 2015. Bhutan’s population is exposed to droughts, landslides, heatwaves, floods, and other hazards. The exposure estimates17 for multiple return periods and hazard intensity thresholds are aggregated at the level of 197 groups of villages, or blocks (gewogs) aligned with the 2022 poverty map.18 The area under the exposure-frequency curves summarizes the estimated national population exposed to various hazards across different return periods (event probabilities) and intensity levels (Figure 10). This measure—the expected annual population exposed (EAE)— accounts for both frequent and low-impact events that affect fewer people, as well as rare and high-im- pact events that affect many people, by weighing the exposed population by event frequency. EAE estimates indi- cate that more people are exposed to fluvial and pluvial flooding and heatwaves than to landslides and drought (Figure 10; Table 2). 17 Based on analysis undertaken as part of World Bank (forthcoming). 18 A return period is a statistical measure used to express the likelihood of a hazard event occurring at or above a specific intensity over a defined period. For example, a 100-year event has a return period of 100 years, meaning there is a 1% probability of it occurring in any given year. This metric helps estimate the frequency and potential impact of extreme events such as floods, droughts, or earthquakes. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 26 1 . B hutan’ s development achievements, climate challenges, and opportunities Figure 10. Exposed population, by hazard type a) Drought b) Floods (pluvial and fluvial) RP40 250 RP1000 RP200 Population exposed (thousands) Population exposed (thousands) 60 200 RP100 RP50 RP20 150 RP10 40 RP5 RP20 100 20 50 RP10 RP5 0 0 5 10 15 20 0 5 10 15 20 Annual exceedance probability (%) Annual exceedance probability (%) >30% land affected >50% land affected >0 m >0.15 m >0.5 m >1.5 m c) Heatwaves d) Landslides RP100 RP1000 600 Population exposed (thousands) Population exposed (thousands) 150 RP20 RP5 RP200 400 100 RP100 RP50 50 200 RP20 RP10 RP5 0 0 0 5 10 15 20 0 5 10 15 20 Annual exceedance probability (%) Annual exceedance probability (%) >28C >30C >33C Significant landslide Note: Graphs show exposed population by annual exceedance probability and hazard intensity threshold. RP = return period. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 27 1 . B hutan’ s development achievements, climate challenges, and opportunities Table 2. EAE, by hazard type Hazard Intensity threshold EAE Drought >30% land affected 3,727 >50% land affected 1,298 Flood (fluvial) >0.15 meters inundation depth 12,639 >0.5 meters inundation depth 9,243 Flood (pluvial) >0.15 meters inundation depth 45,043 >0.5 meters inundation depth 24,089 Heatwave >28°C WBGT (3-day max.) 94,502 >30°C WBGT (3-day max.) 58,097 Landslide Significant landslide 19,716 Source: Etang Ndip A, Brunckhorst B. and Nguyen M. (2025). Note: Linear integration and two important assumptions are made when estimating EAE: (1) zero population is exposed to events with a frequency between the lowest return period event in the data and the annual event (100% exceedance probability), and (2) for the space between the highest return period event and the ∞-year event (0% annual exceedance prob.) the population exposed at the highest return period event was used. Both assumptions tend to reduce exposure. Thus, these estimates are conservative. WBGT = wetbulb globe temperature, a measure of heat stress in direct sunlight that considers temperature, humidity, wind speed, sun angle, and cloud cover. Climate impacts are distributed unevenly across regions and districts. Around 65 percent of the total popula- tion (496,000 people), and 68 percent of the poor are exposed to one or more hazards, underscoring the close link between poverty and vulnerability in Bhutan. Figure 11 presents maps showing both the number and share of people exposed to hazards alongside the poverty rates in each town. Darker areas indicate higher levels of expo- sure and a greater concentration of poverty, signaling limited coping capacity among affected populations. The maps reveal a significant overlap between poverty and hazard exposure, with a greater risk for the poor house- holds facing heightened risks in multi-hazard zones, particularly in central and eastern regions near the southern border, such as Zhemgang and Mongar. Poverty is projected to continue falling in both scenarios, but slightly faster with adaptation.19 Between 2017 and 2022, economic growth and remittances contributed significantly to nearly eradicating extreme poverty, defined as individuals living on less than $2.15 per day. The number of individuals living below the $3.65 per day and $6.85 per day thresholds also declined substantially. Poverty is projected to continue declining over time, based on the $6.85/day poverty line and assuming neutral distribution and demographic adjustments (Figure 12). In the base- line scenario without adaptation, under dry/hot conditions, the poverty rate is expected to fall to 3.2 percent by 19 The poverty projections are based on a scenario where climate change remains unmitigated (RCP8.5 and SSP5) following the work of Burke, Hsiang and Miguel (2015). These projections are applied to the most up-to-date household survey data (the Bhutan Living Standards Survey 2022). Three different approaches are then explored to project poverty rates: 1) assuming that growth (GDP per capita) would be evenly distributed across the entire population (neutral distri- bution) and no demographic change (this is akin to the full climate shock on growth occurring today with no other changes); 2) adjusting the survey sampling weights to align with demographic projections from the UN World Populations prospects, reflecting changing demographics; and 3) assuming climate change worsens inequality (Gini index). Using growth projections from Burke, Hsiang, and Miguel (2015) and assuming a log-normal distribution, simulations of how poverty under climate change could differ as national income inequality worsens is estimated. Inequality is assumed to increase by X% (from 1 to 20) between 2022 and 2050, and for each year the increase in inequality is annualized. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 28 1 . B hutan’ s development achievements, climate challenges, and opportunities Figure 11. Spatial distribution of EAE and poverty in Bhutan at town level a) Population exposed to drought and poverty b) Share of population exposed to drought and poverty exposed exposed Pop. Pop. % poor % poor c) Population exposed to flooding and poverty d) Share of population exposed to flooding and poverty exposed exposed Pop. Pop. % poor % poor e) Population exposed to heatwaves and poverty f) Share of population exposed to heatwaves and poverty exposed exposed Pop. Pop. % poor % poor g) Population exposed to landslides and poverty h) Share of population exposed to landslides and poverty exposed exposed Pop. Pop. % poor % poor Source: Etang Ndip A, Brunckhorst B. and Nguyen M. (2025). Note: WBGT = wetbulb globe temperature, as measure of heat stress in direct sunlight that considers temperature, humidity, wind speed, sun angle, and cloud cover. In panels a and b, EAE = >30% land affected; in panels c and d, EAE = exposed to >0.5 meters of flooding; in panels e and f, EAE = 3-day max WBGT >30°C; in panels g and h, EAE = exposed to significant local landslide. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 29 1 . B hutan’ s development achievements, climate challenges, and opportunities 2030, 0.3 percent by 2040, and nearly eliminated by 2045. In the alternative dry/hot scenario with adaptation, it is projected to be eradicated by 2041. But if inequality increases, poverty rates could be higher. These projec- tions highlight the crucial role adaptation will play in addressing income shocks and preventing widening regional disparities. Figure 12. Impact on poverty rate under the dry/hot mean scenario with adaptation Democratic adjustment Neutral adjustment 8 8 6 6 Poverty rate $6.85 (%) Poverty rate $6.85 (%) 4 4 2 2 0 0 2020 2030 2040 2050 2020 2030 2040 2050 Year Year Baseline dry/hot Alternative dry/hot with adaptation Source: World Bank staff calculations. Note: Poverty rate = $6.85 using 2017 purchasing power parity. 1.3. Bhutan’s adaptation and resilience (A&R) readiness The diagnosis undertaken for this CCDR identifies several gaps in Bhutan’s A&R readiness (World Bank 2024).20 The country has made progress in increasing climate change resilience, with over two-thirds of the indicators clas- sified as emerging (49 percent) and established (20 percent). But there are gaps in improving adaptive capacity and creating the enabling environment needed to deliver adaptation and resilience (Figures 13 and 14). The key findings across the six A&R pillars are as follows. Foundations: lay the foundations through rapid, robust, and inclusive development: Bhutan is performing well in establishing inclusive and resilient growth strategies. It ranks highly among lower-middle-income countries in governance and poverty reduction and is rated as emerging or established in 70 percent of indicators. But low social protection coverage (under 3 percent) and limited financial inclusion (less than 40 percent of adults have a bank account) restrict the country’s adaptive capacity. Compared to other nations, Bhutan’s development policies are robust, but there is room for greater inclusion, especially for vulnerable populations who are most affected by climate risks. 20 Based on the framework described by Hallegatte, Rentschler and Rozenberg (2020), the World Bank’s A&R assessment tool is a macro-level assessment of a country’s A&R readiness, built around six pillars specific to the priority areas of action, supported by a set of qualitative and quantitative indicators, and using a whole-of-economy approach. This diagnosis adopted a light approach that focuses on core indicators and key sectors, reducing the number of indicators from 190 to 119. About 29% of indicators are rated based on quantitative data derived from global datasets and the rest, based on qualitative information collected through consultations with sectoral and country experts as well as expert judgment based on review of relevant and publicly available legislative and executive documents. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 30 1 . B hutan’ s development achievements, climate challenges, and opportunities Priority 1. Facilitate the adaptation of people and firms: Disaster risk data are fragmented and there is insufficient targeting of vulnerable populations. Bhutan’s preparedness for adapting to climate change impacts is emerging (48 percent) or nascent (43 percent), and there are gaps in targeting vulnerable populations with social protec- tion programs. Expanding targeted social assistance programs—including the Druk Gyalpo’s Relief Kidu and the conditional cash transfer program under the Comprehensive Mother and Child Health Program—can provide crit- ical support to those most affected by climate change. Priority 2. Adapt land use plans and protect public assets and services: Bhutan has scope to integrate climate-re- silient infrastructure more deeply into urban planning, ranking emerging for almost 60 percent of urban planning and critical infrastructure resilience indicators. Priority 3. Help firms and people manage residual risks and natural hazards: Bhutan’s social protection systems are underdeveloped, and its disaster-specific insurance schemes are limited, with more than half the indicators in this category scoring nascent. Priority 4. Manage financial and macrofiscal issues: Bhutan has made progress in accessing disaster-contin- gent financing and advancing macrofiscal policies, but climate and disaster risks are not integrated into financial systems, and the country does not comprehensively undertake explicit climate-related budgeting. Applications: Prioritization, implementation, and monitoring progress: Bhutan has established robust adapta- tion strategies through its NAP and LTS. But, while these provide clear priorities, the country needs to improve institutional coordination, tracking mechanisms, and role clarity. Adopting more advanced monitoring tools and data-driven tracking would allow for a more robust, evidence-based approach to measuring progress, paralleling methods used by higher-performing nations. The A&R assessment indicates several areas of focus to improve resilience. Strengthening social protection coverage and access to financial services would increase the adaptive capacity of vulnerable populations, while improving data availability and robustness, technical capacity, and institutional coordination would help promote resilient water, energy, agriculture, and urban and land use systems. Further developing the insurance sector, building a social protection system that is responsive to shocks, and supporting firms to develop business conti- nuity plans would help firms and people cope with and recover from natural disasters. Building adequate capacity, tracking climate-related expenditures, and monitoring and evaluating progress would help ensure effective imple- mentation of the NAP . Building resilience to climate change requires targeted action across key sectors that underpin Bhutan’s econ- omy and livelihoods. Almost 60 percent of indicators under “Priority 2: Adapt land use plans and protect critical public assets and services” are assessed as emerging, 13 percent are nascent, and only 28 percent are estab- lished (Figure 13), while all indicators under “Make land use plans and urban development strategies risk-informed” and “identify critical public assets and services” are assessed as emerging (Figure 15). This CCDR analyzes the scope for improving resilience in three sectors—hydropower and water, agriculture, urban development and critical infrastructure—through focused “deep dives” that assess their current adaptive capacity (chapter 2). B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 31 1 . B hutan’ s development achievements, climate challenges, and opportunities Figure 13. Bhutan’s A&R performance across all pillars A: Prioritization, implementation and progress monitoring 7 13 4 P4: Manage financial and macrofiscal issues 1 2 P3: Help firms and people manage residual risks and natural disasters 10 8 1 P2: Adapt land use plans and protect critical 4 public assets and services 19 9 P1: Facilitate the adaptation of people and firms 9 10 2 F: Foundations for rapid, robust and inclusive growth 5 6 8 0 20% 40% 60% 80% 100% Share of indicators Nascent Emerging Established Source: World Bank 2024. Note: Each bar indicates the number of indicators per rating category. “Nascent” (red) is assigned when the country does not meet the standard or includes areas that are only starting to emerge, or ranked in the lower tier of a benchmark group; “emerging” (yellow) is assigned when the country partially meets the standard and has progressed beyond the initiation point, or is ranked in the middle tier of a benchmark group; “established” (green) is assigned when the country meets the standard, or is ranked in the higher tier of a benchmark group. Figure 14. Country performance across the six A & R pillars Country performance across the six A&R pillars 3.0 2.5 Readiness score 2.0 1.5 1.0 Guinea Côte d'voire Kosovo Togo Haiti Senegal Uganda Bhutan Ecuador Suriname Trinidad and Tobago Armenia Cabo Verde Moldova Tajkistan Albania Serbia North Macedonia Belize Bahamas, The Türkiye Cambodia Bosnia and Herzegovina St . Vincent and the Grenadines India Antigua and Barbuda Montenegro Sint Maarten (Dutch part) Peru Guyana Dominica Barbados Azerbaijan Uzbekistan Colombia Turks and Caicos Islands St. Kitts and Nevis St. Lucia Jamaica Grenada Dominican Republic China Poland Austria Foundations Priority 1 Priority 2 Priority 3 Priority 4 Applications Overall A&R score Source: World Bank 2024. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 32 1 . B hutan’ s development achievements, climate challenges, and opportunities Figure 15. Land use plans critical public assets and services Strengthen the resilience of critical infrastructure systems: energy 1 13 2 Avoid depletion of natural capital and increase resilience of forests and other natural ecosystems 2 2 3 Increase resilience of the water sector and ensure water security 2 1 8 3 Increase resilience o f the agriculture sector and 1 ensure food security 5 1 Make land use plans and urban development 7 strategies risk-informed Design and implement a governmentwide strategy to 1 increase the resilience of infrastructure systems 1 Identify critical public assets and services 2 0 20% 40% 60% 80% 100% Share of indicators Nascent Emerging Established Source: World Bank 2024. Note: The number in each bar indicates the number of indicators per rating category. To minimize losses from climate disasters, Bhutan needs to strengthen resilience and preparedness for extreme weather and residual risks. Nearly 95 percent of the indicators for actions that minimize residual risks are assessed as nascent (53 percent) and emerging (42 percent), suggesting that Bhutan needs to adopt improved strategies to ensure people and firms can better manage and recover from the impacts of such risks (Figure 16). Developing a comprehensive social registry to identify high-risk households and potential beneficiaries would help ensure social protection initiatives and disaster risk management (DRM) information systems are both interoper- able and risk-informed. To improve private sector resilience, Bhutan can encourage firms to assess climate risks and increase their financial preparedness to minimize possible interruptions. Encouraging public-private partner- ships (PPPs) to offer affordable and reliable insurance to households and firms could also help strengthen the insurance sector. Some insurance schemes are in place, but specific disaster risk coverage is limited, and the uptake of instruments under the 2013 Disaster Management Act is ad hoc and fragmented. Figure 16. Manage residual risks and climate change impacts Help firms develop business continuity plans and financial preparedness 3 1 Build a social protection system that is 4 responsive to shocks Develop the insurance sector, building on public-private partnerships 1 1 Provide all firms and households with risk 1 management instruments Save lives (and money) with hydromet, early warning and emergency management systems 2 5 1 0 20% 40% 60% 80% 100% Share of indicators Nascent Emerging Established Source: World Bank 2024. Note: Each bar indicates the number of indicators per rating category. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 33 1 . B hutan’ s development achievements, climate challenges, and opportunities Developing a robust adaptive social protection framework would mitigate the socioeconomic impacts of disas- ters and build long-term resilience for communities at risk. The Kidu program, under His Majesty’s Secretariat, has been instrumental in providing immediate relief during crises, including direct cash transfers and in-kind support. But Bhutan lacks an adaptive social protection system that is systematically linked to DRM and early warning systems (EWS). Existing programs, such as rural house insurance and disaster relief funds, provide some finan- cial security, yet their reach and effectiveness are limited. To further integrate its DRM-EWS with social protection, Bhutan would need to improve the interoperability of program databases, expand financial protection mechanisms for vulnerable populations, and institutionalize scalable safety nets that can be triggered preemptively based on hazard forecasts. Strengthening labor market programs—such as the Ministry of Industry, Commerce, and Employ- ment’s (MoICE) Youth Engagement and Livelihood Program and the Build Bhutan Project—equips workers with skills for climate-resilient jobs, enhancing their employability and economic security. Improving financial literacy through the National Pension and Provident Fund (NPPF), implementing initiatives under RMA’s National Financial Literacy Strategy 2018–23, and expanding digital financial services can help individuals and households build adaptive capacity. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 34 2. STRENGTHENING RESILIENCE IN KEY SECTORS: HYDROPOWER, AGRICULTURE, AND CITIES B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 35 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities 2.1. Resilient hydropower Bhutan is a hydro-rich nation, but climate change Figure 17. Installed capacity and firm power threatens to widen the gap between installed capacity in Bhutan, 2024 (MW) and firm capacity, increasing revenue risks during 3,000 low-flow dry seasons. Electricity exports peak during the monsoon months of June to September, and 2,500 Capacity (MW) output is lower during the lean season of January to 2,000 March. As of May 2024, Bhutan’s installed capac- ity stood at 2,453 MW—including 8 MW embedded 1,500 generation and 750 kilowatts of solar—with the most 1,000 recent capacity addition of 118 MW from the Nikachhu hydropower project in January 2024. But firm capacity, 500 which represents reliable year-round output, is only - 455 MW (Figure 17), representing only 9 percent of its Installed capacity Cumulative firm power capacity total feasible capacity, meaning a significant portion from all hydropower plants of Bhutan’s hydropower potential remains untapped.21 Hydropower plants Chukha Tala Basochu Kurichhu Domestic and regional electricity market dynamics Dagachhu Nikachhu Mangdechhu are shifting, and climate change impacts are exacer- Source: Department of Energy 2024. bating the growing gap between supply and demand. Historically, Bhutan’s hydropower export market has been defined by the Bhutan-India joint development and trading scheme. Under long-term power purchase agree- ments, Bhutan exports its electricity surplus to India during the summer, when demand peaks there. These exports account for approximately 75 percent of Bhutan’s total electricity output. But growing domestic demand and unreliable supply during the dry season (November to March) have strained this surplus. To address the short- fall, Bhutan purchased electricity for the first time in 2022 through the Indian Power Exchange to meet its needs during the dry season. Bhutan has designed an ambitious energy vision to secure its energy future, meeting rising domestic demand and protecting the country from the volatility of electricity imports. Direct revenue from hydropower, including taxes, dividends, and royalties, was projected to account for 36 percent of total government revenue (Nu 26 billion or $360 million) by the end of the 12th FYP (2023). The number of hydropower plants is expected to increase significantly between 2025 and 2040, with 32 planned projects expected to add approximately 17 gigawatts (GW) . Under this plan, RGoB seeks to prioritize pumped storage, large capacity hydropower plants, and solar power. The cumulative capacity is expected to exceed 25 GW by 2040 (Figure 18). 21 Bhutan’s Power System Master Plan 2040 estimates hydropower potential at ~32,600 MW, of which 26,760 is economically feasible. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 36 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Figure 18. Planned energy capacity addition in Bhutan by 2040 MW Capacity Addition (Hydro + Solar) by 2040 30000 25000 Capacity (MW) 20000 15000 10000 5000 0 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Firm Power (MW) Hydro (MW) Solar (MW) Source: World Bank staff calculations, based on data from Ministry of Energy and Natural Resources (MoENR) Bhutan’s hydropower infrastructure may be exposed to multi-hazard risks. Beyond water availability, the country is also vulnerable to GLOFs, landslides, and seismic activity. Climate change-induced hazards disrupt hydropower generation and amplify risks to infrastructure. For example, heavy rainfall can trigger landslides, which block rivers, raising the likelihood of dam breaches or landslide dam outburst floods, while earthquakes can destabilize fragile landscapes. Such cascading hazards require specific attention, as a single event can lead to a series of disrup- tions, compounding existing vulnerabilities. Increased sedimentation from glacial melt can also deteriorate infra- structure, reducing the efficiency and lifespan of facilities. The interaction of these multi-hazard risks with changing hydrological patterns increases the urgency to adapt the sector. Continued investment in resilient designs is vital to build infrastructure that can withstand the interconnected risks of the high mountain environment and ensure hydropower projects are robust enough to face seasonal and multi-hazard risks. Impact scenarios for hydropower production Climate change may impact hydropower generation directly, by reducing river runoff, and indirectly, through changes in water demands for competing uses, such as irrigation. This analysis uses a Water Evaluation and Planning (WEAP) water systems model22 to estimate future conditions by basin under different climate futures and model the effects of climate change on hydropower production. Monthly hydropower generation is produced as model output, and an evaluation of climate change impacts is carried out by comparing baseline production across different scenarios. The results are outlined under the two impact pathways outlined below (increase in river runoff and increased exposure to flooding). The main assumptions and limitations are noted in Table 3. The analyses provide preliminary results to inform planning-level consultations and require additional in-depth studies to further refine their findings, including at facility design level. 22 https://www.sei.org/tools/weap/. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 37 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Table 3. Impact scenarios for hydropower production: assumptions and limitations Development scenario Baseline Assumptions Installed hydropower capacity of 2,326 MW. Planned hydropower plants, representing an additional 4,167 MW, will come online between 2024 and 2031, corre- sponding to the plants that are currently already underway, with no additional future projects. The analysis does not consider balancing with other energy sources. Limitations The planning scale data used in this study may not be granular enough to capture the full range of complexities in subcatchments and at particular infrastructure locations of interest. The analysis was conducted at a monthly time interval that assumes water can be allocated efficiently within a month and does not account for fluctuations in water levels from either inflow or hydropower generation during peak demand hours or days (weekend vs weekday). Monthly water system models tend to miss smaller timescale variations in demand. Impact Pathway 1: River runoff The seasonality of river runoff is expected to remain stable, but the magnitude of runoff may change due to shifts in precipitation patterns and altered hydrological regimes.23 Potential changes in temperature and precip- itation are expected to impact river runoff across Bhutan. Figure 19 shows the average projected monthly runoff over 2041–50, by climate scenario, with solid lines representing the mean scenarios, and dotted lines represent- ing the individual scenarios. Compared to future runoff without climate change (the no climate change reference line in black), runoff seasonality is not predicted to significantly differ across scenarios, with peaks continuing to occur in June through October for each of the modeled futures. But the magnitude of flow is expected to vary significantly, with conditions under the wet/warm mean scenario resulting in more pronounced increases from June through to October, and the dry/hot mean scenario experiencing declines in flow between May and December. Figure 19. Average projected monthly runoff, 2041–50 8 Runoff (in thousands m3/second) 6 4 2 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec No climate change reference Wet/warm Mean Dry/hot Individual GCM Source: IEc 2024. . 23 Runoff is generated from precipitation, temperature, and evapotranspiration data (using the rainfall-runoff model CLIRUN), and then inputted into the WEAP B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 38 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Change in magnitude of river runoff flow is expected to impact hydropower generation. Across hydropower facil- ities, impacts are varied as the analysis captures run-of-river hydropower, which implies that changes in runoff under the wet/warm (or dry/hot) mean scenarios translate directly to changes in generation as no sizeable reser- voir storage exists to preserve water for drier months. As a result, generation impacts will directly depend on the runoff changes. By 2041–50, under the wet/warm mean scenario, generation is projected to increase by approxi- mately 1.6 percent, while under the dry/hot mean scenario, it is expected to decline by around 5.1 percent. From 2024 to 2034, climate change has a negative effect on hydropower generation under both scenarios (Figure 20), increasing river runoff interannual variability, leading to high interannual variability of available hydropower capac- ity and significantly impacting Bhutan’s firm power capacity. Figure 20. Projected hydropower generation change under two climate scenarios, 2021–50 10% 0 -10% -20% 2020 2025 2030 2035 2040 2045 2050 Dry/Hot mean Wet/Warm mean Individual Dry GCMs Individual Wet GCMs Source: IEC 2024. The changes in expected runoffs are heterogenous across river basins. Marked increases in average annual runoff are anticipated across all basins under the wet/warm mean scenario by mid-century (Figure 21), peaking at 19 percent according to preliminary estimates. Under the dry/hot mean climate scenario, runoff impacts are expected to be largely negative, with decreases largest in the Punatsangchhu and Drangmechhu Basins, estimated at up to -13 percent. While a robust decision-making analysis is beyond the scope of this CCDR, an analysis of the runoff changes by basin across the full range of 55 SSP2–4.5 and SSP3–7.0 GCMs shows that the median projection runoff increases are expected to be more pronounced in basins such as Aiechhu and Nyera Amari, while the median runoff in Drangmechhu is projected to decline slightly by 2050, relative to the historical baseline. Figure 21. Average annual runoff relative to no climate change reference scenario, 2041–50 a) Dry/hot mean scenario b) Wet/warm mean scenario Drangmechhu Drangmechhu Punatsangchhu Merak-Sakeng Punatsangchhu Merak-Sakeng Wangchhu Mangdechhu Wangchhu Mangdechhu Amochhu Jomori Amochhu Jomori Jaldakha Jaldakha Aiechhu Nyera Amari Aiechhu Nyera Amari % difference -7% -6% -4% -2% 2% 3% Source: IEc 2024. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 39 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Impact Pathway 2: Flooding Hydropower infrastructure in the Drangmechhu and Mangdechhu Basins is particularly prone to pluvial flood- ing. As climate change drives more frequent and more severe storms in Bhutan, the risk of overtopping and flood damage to hydropower facilities increases. Although these facilities were designed for historical flood conditions, the rising intensity of high-precipitation storms could surpass previous extremes. The partial washout of the Yungichhu hydropower Project in 2023 shows that high-precipitation storm events remain a threat. Flood depths for the analysis are estimated based on Fathom flood data used in the inland flooding model. But the Fathom model has a maximum reporting threshold of 10 meters, so flood depths recorded as 10 meters may exceed this limit, and these risks are likely to increase due to climate change. Analyzing the changes in flood depths at loca- tions where key installed or planned hydropower infrastructure are located helps planners understand the dangers posed by flooding. The key messages of the analysis are summarized in Table 4. Table 4. Exposure of river basins to flooding impacts Pluvial flood Fluvial flood 100-year The most-exposed hydropower infrastructure is in the Fluvial flooding has posed a threat to facilities in several historical depth Drangmechhu Basin, where three out of four facilities are basins, with 100-year historical fluvial flood depth levels exposed to 100-year historical pluvial flood depth levels of ranging between 6.3 and 10 meters 10 meters (the maximum reporting threshold of the flood model) Depth The locations that are most exposed to projected steep Fluvial flood depth increases would remain under 5.4 increases by flood depth increase are in the Drangmechhu and Mang- percent in hydropower facilities located in all three basins 2050 dechhu Basins analyzed The largest installed and planned plants exposed to depth increases are expected to reach double digit growth rates by 2050 Managing environmental risks Bhutan is committed to leading the region in adopting international best practices for hydropower development and dam safety, making notable progress in these areas. To mitigate risks to hydropower infrastructure, RGoB has already undertaken important adaptation and mitigation efforts supported by development partners. For example, the World Bank’s Climate and Disaster Resilience Development Policy Credit with a Catastrophe Deferred Draw- down Option (Cat DDO) has provided technical assistance through a hydropower design gap analysis. Based on this analysis, the MoENR, through the Department of Energy, revised Bhutan’s Hydropower Design and Dam Safety Guidelines in July 2024, enhancing dam safety protocols and incorporating comprehensive geohazard consider- ations. These updates now mandate integrated geohazard assessments for future projects, ensuring that anal- yses shift from site-specific to multi-hazard mapping of entire catchment areas, addressing both upstream and downstream risks, including landslide, seismic, and meteorological risks. The sustainability of hydropower production can be enhanced through climate-resilient infrastructure. Bhutan should adopt a risk-based classification and management system that addresses emerging climate and geohaz- ard challenges when building new plants. RGoB can draw on World Bank’s knowledge, including the Good Practice Guide for Dam Safety (World Bank 2020) and Laying the Foundations: Essential Elements for Assuring the Safety of Dams and Downstream Communities (World Bank 2021) when developing this new, updated system, and should undertake stakeholder consultation to ensure changes align with local and regional requirements. Establishing comprehensive standard operating procedures (SOPs) for GLOF monitoring and building capacity for safe hydro- power dam operations within the NCHM will also strengthen disaster preparedness and resilience. Undertaking B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 40 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities detailed hydrological studies of catchment areas or sub-basins would improve modeling accuracy and support the construction of sequential hydropower schemes along the same river system, making hydropower expansion plans more resilient. To strengthen energy security, Bhutan can continue to explore the benefits of importing energy from India, Bangladesh, and other trading partners through a diversified stream of pricing schemes. During low price times, spot market trading will allow Bhutan to benefit from prices that have averaged between INR 2.25–3.9 per kilowatt hour (average India market clearing price in 2016 and 2018, respectively). To address peak price times, it could explore identifying least-cost storage options to combine with medium-term flexible power purchase agreements with trading partners based on fiscally sustainable terms. Bhutan also has significant potential for solar energy, which could enhance the resilience of the power grid and mitigate seasonal imbalances in power generation. RGoB has prioritized the development of solar projects, aiming to establish 5,000 MW of solar capacity by 2030, and has encouraged private sector engagement. Developing comprehensive and sustainable water management strategies can enhance water security and hydropower efficiency. Hydropower in Bhutan, particularly run-of-the-river systems, depends on maintaining steady water flow throughout the year. To ensure the long-term sustainability and efficiency of hydropower, key interventions include riparian zone restoration, watershed reforestation, sedimentation management, and devel- oping multipurpose water storage solutions. Restoring forests and vegetation along rivers helps stabilize river- banks, reduce erosion, and improve water quality by filtering out sediment and pollutants. Well-managed forests in upstream areas also regulate water flow by capturing rainwater and releasing it gradually, which is essential for maintaining river levels. Expanding reforestation efforts in critical upper watershed areas, such as the Wangchu and Punatsangchhu Basins, can improve water infiltration and reduce surface runoff. Hydropower in Bhutan can support climate change mitigation across the region if soft and hard infrastructure is implemented to encourage further regional integration. To complement efforts to replace fossil-fuel based electricity generation in South Asia, Bhutan can explore regional hydropower trade and storage opportunities, as solar and wind both require ancillary services such as short-term storage to ensure a continuous supply of energy. If Bhutan’s hydropower plants can hold back flows, even for a few hours, the energy stored can provide backup for solar and wind plants, allowing countries within the Bangladesh-Bhutan-India-Nepal (BBIN) trading block to increase the share of renewables in their generation mix. For example, access to 1 MW of hydro capacity could support an increase of 2–6 MW in India’s installed solar capacity. The BBIN countries could also explore the cost and technical and regulatory feasibility of additional services, such as regional-level frequency control and stabili- zation. But to realize these aspirations, they will all need to invest in climate-resilient transmission infrastructure. 2.2. Climate-smart agriculture (CSA) Agriculture is key to ensuring livelihoods and food security in Bhutan, but the sector’s dependence on small and traditional farms makes it susceptible to climate-induced risks. The mountainous nature of most rural areas in Bhutan, where about 31 percent of farming takes place on slopes, exposes agricultural production to various climate-related production risks. Recurrent tropical cyclones, floods, landslides, and erosion threaten agricul- tural productivity, while a reliance on monsoon rains, short growing periods, and the prevalence of smallholder, subsistence production further accentuates susceptibility to changing climate and environmental conditions in the absence of proper coping mechanisms. Climate change may increase agricultural output in the short term; but it will lead to more variable yields in the long term due to increased heat and erratic rainfalls. Over the last 70 years, average temperatures in Bhutan have increased by 0.2 degrees per decade and precipitation patterns have changed, with an increased B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 41 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities divergence between the north and south. Extreme weather events—such as flash floods, landslides, drought, and soil erosion—are expected to increase in both frequency and intensity, affecting yields due to insufficient water availability, crop losses due to flash floods, and incidence of new diseases. But the predicted yield impact depends on the crop type and agroecology. For example, land at higher altitudes may become suitable for crop production due to higher temperatures and increased rainfall, and land suitable for rice cultivation is expected to increase by 10 percent by 2050. Increasing temperatures and frequency of hot days are also likely to adversely impact livestock, particularly milk quality. Bhutan can strengthen its agrifood systems and build resilience against the long-term adverse impacts of climate change by promoting CSA technologies and practices. CSA encompasses many sustainable technologies and practices that are proven to enhance climate resilience and sustainability of production while promoting growth and agricultural development. It addresses key challenges in the sector, including unsustainable traditional prac- tices that degrade land and ecosystems, reducing soil fertility, increasing the incidence of pests and diseases, and diminishing returns to production. Bhutan can capitalize on a conducive policy environment that integrates the adoption of low-emission pathways into agricultural development by promoting sustainable land, livestock, and water management, improved varieties and animal breeds, organic fertilizer, pesticides, and perennial crop production. Urgently scaling up CSA adoption can help Bhutan build long-term resilience, fulfill its climate commitments, and maintain its leadership in environmental stewardship. Despite its importance in improving adaptive capac- ity among smallholder farmers, on-farm adoption of CSA is not widespread. The Department of Agriculture has released 46 CSA technologies, but there is no national-level data on their adoption. Most CSA technologies are promoted through donor-funded projects focused on demonstrating and creating awareness of their benefits. The adoption process might take several years,24 although targeted demonstration activities—such as those under the World Bank-supported Food Security and Agricultural Productivity Project—indicate high adoption rates. This suggests a need to repurpose public expenditure toward investments that facilitate the development and wide- spread promotion of CSA technologies suited to smallholder farmers. Investing in research and development (R&D), extension, input delivery, and effective regulation of new technologies, crop varieties, and animal breeds, can accelerate sustainable productivity growth and climate resilience. Reducing transaction costs for smallholder farmers would provide an incentive to adopt CSA technologies and practices. Sustainable production practice comes with upfront costs that typically exceed what smallholder farmers could bear, especially in Bhutan, where farmers typically rely on government support. Public support may be needed to cover upfront costs—such as the cost of conversion, loss of productivity, and increased labor demand during the transition—and to create demonstration effects. Some CSA technologies and practices also have medium-term benefits that do not align with farmers’ short-term needs in terms of increased productivity and income. Reducing GHG emissions by improving organic matter and water-holding capacity in soils, replanting trees in orchards, and managing landscapes takes time and generates medium- to long-term benefits, underscoring the need to reward farmers for adopting practices that generate social benefits. Climate-smart agriculture investment plans (CSAIPs) To scale up the adoption of prioritized CSA investment packages, Bhutan must create an enabling environment and invest public funds to support the transition to sustainable production practices. Public and private actors need evidence-based information to guide their CSA investment decisions. CSAIPs are strategic and evidence- based planning documents that propose high-potential, market-oriented, and inclusive investments in scientifically vetted CSA packages. They were developed to guide investment that would transform the agrifood system through a participatory approach with multiple public, private, and civil stakeholders. The outcome is a set of country-sup- ported investment-ready plans that can crowd in both public and private investment. 24 Some evidence suggests that the demonstration of CSA technologies does not immediately translate into improved knowledge among trained farmers, or their adoption of the technologies, in Bhutan (UNDP 2023). B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 42 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities CSAIPs propose investments to address the major impacts of climate change on yield, labor productivity, and post-harvest management in four priority subsectors—paddy, dairy, potato, and citrus—with two investment pack- ages per commodity. CSAIP 1, which aims to increase yields and soil fertility and sustainably reduce GHG emissions, involves a combination of improved varieties or breeds with improved crops, animal, soil, or orchard management. CSAIP 2, which targets labor savings, lower post-harvest losses, and reduced GHG emissions and intensity, promotes paddy mechanization, improved cow manure management, and improved mandarin and potato post-harvest management. The packages were subjected to an economic, financial, and GHG analysis (EFA) to estimate gross margin, economic rate of return, and GHG reduction indicators and compare them to the baseline scenario. The analysis assumes a farmer invests in a one-acre or three-cow farm under a fully enabling environment. Table 5 summarizes the EFA results. Table 5. EFA summary for the prioritized CSAIPs Commodity and On-farm financial assessment Economic Climate benefit package (CSAIP 1 or 2) assessment CapEx OpEx Gross NPV EIRR ERL GHG Intensity ($/acre) ($/acre/y) margin ($) (%) (Nu/person reduction reduction ($/acre) day) (%) (%) PADDY 1: Improved varieties and crop 0 1,299 1,198 5,046 21 67 87 management 2: Direct seeded rice and 722 - 163 163 2,351 64 16 65 65 mechanization Combined 1 and 2 722 1,187 1,310 5,777 173 28 65 87 DAIRY 1: Improved breeds and animal 5,118 1,171 2,162 19,022 50 24 56 71 management 2: Improved manure 1,019 126 710 5,851 48 28 48 98 management Combined 1 and 2 6,137 1,297 2,871 24,874 50 25 56 81 POTATO 1: Improved varieties and soil 2,404 49 71 395 14 4 71 74 management 2: Improved post-harvest 676 187 430 2,095 48 16 0 10 practices Combined 1 and 2 3,025 249 557 2,491 31 21 74 76 CITRUS 1: Improved orchard and soil 1,686 324 252 44 10 15 38 70 management 2: Improved post-harvest 1,361 33 314 538 17 17 0 22 practices Combined 1 and 2 3,044 351 444 226 11 29 38 71 Source: World Bank staff calculations Notes: CapEx = capital expenditure; OpEx = operational expenditure (all variable costs); NPV = net present value; EIRR = economic internal rate of return; ERL = economic return to labor. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 43 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities The EFA indicates significant returns to investment and GHG reduction potential from on-farm investments in prioritized CSAIPs. Adopting improved varieties and integrated soil nutrient management in paddy generates good return to labor while minimizing GHGs, as it allows for two production cycles, produces higher yields, and has a more balanced use of fertilizers. Mechanizing paddy further reduces labor requirements and generates a large economic internal rate of return (EIRR). Investing in improved cow breeds and better animal health management generates an EIRR of almost 50 percent while reducing GHG emissions by half, mostly from pasture management and reduced herd sizes. For potatoes, investing in improved varieties and soil nutrition management generates an EIRR of 14 percent and reduces GHG by more than 70 percent. Similarly, for citrus, investing in improved planta- tion, land and soil management, and integrated pest and disease management generates an EIRR of 10 percent. For both potato and citrus, investing in modern post-harvest practices and equipment has additional economic benefits and reduces emissions intensity. Despite these significant on-farm benefits, Bhutan’s readiness to scale up and invest in CSAIPs varies. A quali- tative assessment complementing the EFA to assess the technical feasibility, market smartness, and overall read- iness of each CSAIP based on the current policy framework, input and service ecosystem, and market conditions25 shows that low capacity and geographical differences in access to farm input and advisory services are barriers to adopting improved varieties or breeds (Table 6). Investing in dairy breeds, potato varieties, and better management practices requires sizable upfront capital investment, which can pose a significant challenge in rural areas where financial literacy is low, access to financial services is limited, and there are no financial mechanisms to reward GHG reductions. The potato and citrus subsectors are more ready to absorb investments in improved post-har- vest practices because they have better-developed value chains, farmers have access to export markets, youth groups can engage in post-harvest service delivery, and there is significant ongoing investment in public market- ing infrastructure. But coordination with stakeholders will be crucial. As aggregators typically perform post-har- vest practices, the success of introducing youth groups for service delivery and a quality-based price premium for farmers will depend on value chain actors’ willingness to accommodate new entrants or formalize the value chain. Scaling up CSAIPs Public investments to create an enabling environment can facilitate widespread private investment in CSA. Table 6 identifies entry points for CSAIP-specific complementary investments based on the intensity of the cross-cut- ting adoption challenges. For paddy, public investment in terrace consolidation and appropriate technologies and machines for mountainous terrains will facilitate private investment in on-farm mechanization. Upgrading dairy production systems will only pay off if dairy products are standardized, shelf life is increased, traceable hygienic practices are adhered to, and a quality-based milk pricing mechanism is established. Improved animal health will require access to veterinary services (currently offered for free), training for community artificial insemination technicians, and strengthening zoonotic disease prevention and control systems. Investments to increase the quality and grading of potatoes through standardization, traceability, and certification of organic or good agricul- tural practices would help capture a price premium. Strengthening the supervision and monitoring of registered sapling nurseries would also ensure quality control and mitigate the spread of disease, while investing in energy-ef- ficient processing, storage, and distribution can reduce food waste in potato and citrus production and increase marketable volumes. Significant resources are required to deliver complementary and cross-cutting public investments to mobilize private investment in CSAIPs. To achieve 25 percent of the 13th FYP target, the total estimated investment cost26 for each commodity to scale up CSA adoption, contingent on different assumptions on cost-sharing mechanisms 25 The parameters were: agronomic and scientific evidence; current degree of adoption; scale-up potential in terms of beneficiaries and geography for feasibility; market preference (e.g., quality and taste of varieties); potential for private sector, youths, and women to participate; potential to address multiple challenges for smartness; and policy enablers, barriers and interventions for adoption and scaleup for readiness. The assessment relied on feedback from the validation workshop, secondary data, published articles in Bhutanese journals, and input from government commodity coordinators. 26 This includes a one-time subsidy for initial on-farm capital expenditure, a yearly subsidy for incremental on-farm nonlabor operational costs (compared to busi- ness as usual) for five years, and the cost of CSAIP-specific complementary investments. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 44 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Table 6. Summary of qualitative assessment of Bhutan’s readiness to adopt prioritized CSAIPs Commodity and CSAIP package Readiness Entry points Feasibility Smartness Readiness Overall Improved varieties and Potential to scale up Good market preference Strong EEP, but low seed M 1 crop management adoption to other and ISM can address availability, awareness, geographies multiple challenges and demonstration PADDY Direct seeded rice and Reduces labor problems Youth and private sector Strong EEP but low M 1,2,4 mechanization but bird attacks, small can deliver machinery awareness and plots, geography, and services demonstration peak machine demand are problems Improved breeds and AI, sexed semen, cross- Youth and women can Strong EEP and prior H 1,3,6 animal management breed farms, and engage in AI, processing, public investment, but improved breeds are marketing, and supervi- lack of risk sharing and available, high potential sion services finance for high initial of green infrastructure investment DAIRY Improved manure Biogas can replace LPG Multiple benefits to Strong EEP, but M 3 management and firewood to satisfy reduce GHG, crop yields, high upfront capital domestic cooking energy and nutrient leakage but investment demand little room for private sector engagement Improved varieties and Some potential to scale Youth and community Lack of quality inputs M 1,2, soil management up large adoption rates groups can participate in and awareness 4,5 in targeted areas to other seed production, distri- geographies bution, and soil advisory services POTATO Improved post-harvest Large potential to reduce Youth can offer grading Ongoing public invest- H 1,3, practices FLW; but traditional and sorting services, ment in post-harvest 5,6 post-harvest practices allowing them to tap into infrastructure and are mostly performed by niche markets for potato market exploration middlemen seed (Nepal, Singapore) Improved orchard and Existing evidence and Youth can deliver citrus Ongoing public orchard M 1,4, soil management pilots show high poten- seedlings, equipment, rehabilitation initia- 6 tial; but the package and drip irrigation tive and strong EEP; requires more labor and layout and maintenance but high upfront capital knowledge service Intercropping investment will increase yields, soil fertility, and income diversification CITRUS Improved post-harvest Large potential to reduce Investment in grad- Strong EEP and export H 1,4, practices FLW; but traditional ing and sorting creates markets considered 5,6 post-harvest practices youth jobs, allows for ready to absorb graded are mostly performed by the development of the products middlemen processing industry, and can be used for other crops B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 45 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Commodity and CSAIP package Readiness Entry points Feasibility Smartness Readiness Overall Cross-cutting challenges Entry points Extension and R&D 1. Strengthen existing extension system, introduce new models (farmers field school; training of train- ers), secure funding to implement research strategy at departmental level Farm input and advisory 2. Strengthen existing ecosystem, introduce complementary private sector services (e.g. AI, quality ecosystem saplings) introduce new value-addition inputs and equipment (e.g. sodium azide for shelf life, porta- ble milking machine) Access to finance 3. Make current cost-sharing mechanism more selective and targeted, introduce matching grants for CSA or green infrastructure, financial literacy support to apply for subsidized loans under ESP Transaction and logistical costs 4. Introduce machinery for hilly terrain, offer mechanized post-harvest services, develop cold chain infrastructure, establish central aggregation hubs Standardization, traceability, 5. Develop milk quality standards, SOP for post-harvest practices, laboratory for nutrition testing, scale and certification up LOAS certification; quality-based pricing mechanism Product diversification 6. Introduce new varieties of potato (high starch) and mandarin (juicy) to support development of local processing industry Source: World Bank staff calculations. Notes: EEP = enabling policy environment; FLW = food loss and waste; LPG = liquefied petroleum gas; red = low readiness, yellow = medium readiness, green = high readiness. or subsidies,27 can range from $189 to $1,114 per beneficiary for potato and dairy, respectively (Table 7). The high cost of greening and modernizing dairy production systems is not surprising, given the upfront investments required for improved breeds and animal health equipment, which need to be imported. Public investment for cross-cutting solutions to scale up CSA packages during the project timeline would cost $1.22 million. These high costs illustrate the need for a coordinated approach across public and private sectors to promote climate resilience and adaptation. 27 Moderate subsidy includes 50% of capital expenditure in first year and 20% on yearly nonfarm operational costs for five years. Significant subsidy includes 70% of capex in first year and 30% on yearly nonfarm operational costs for five years. Complementary investment costs depend on readiness: 5% and 10% of total nonlabor operational costs are assumed for high and medium readiness, respectively. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 46 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Table 7. Estimated cost of scaling up CSAIP to achieve 25 percent of 13th FYP targets Indicator One-time subsidy for Yearly subsidy for Complementary CSAIP- Total investment cost Average annual cost initial on-farm CapEx incremental on-farm specific investments to scale up CSAIP ($, per beneficiary ($/ cost ($, millions) nonlabor operational ($, millions) millions) beneficiary) cost ($, millions) Paddy: 1,311 beneficiaries needed to produce 3,369 MT target with an import substitution value of $1,278,321 million CSAIP 1 – 1.7–2.6 0.2–0.3 1.9–2.8 357 CSAIP 1&2 0.5–1.1 1.6–2.3 0.2–0.3 2.2–3.8 458 Dairy: 4,859 beneficiaries needed to produce 7,539 ML target with an import substitution value of $8,607,328 million CSAIP 1 12.4–17.4 5.7–8.5 0.9–1.3 19.0–27.2 952 CSAIP 1&2 14.9–20.9 6.3–9.5 1.1–1.5 22.3–31.8 1,114 Potato: 3,348 beneficiaries needed to produce 1,509 MT target with an export value of $1,015,167 million CSAIP 1 4.0–5.6 0.2–0.4 0.4–0.6 4.6–6.6 336 CSAIP 1&2 2.4–3.4 0.1–0.2 0.1–0.2 2.6–3.7 189 Citrus: 3,348 beneficiaries needed to produce 3,893 MT target with an export value of $1,134,010 million  CSAIP 1 5.0–7.0 1.9–2.9 0.7–1.0 7.6–10.8 312 CSAIP 1&2 8.4–11.8 1.8–2.7 0.5–0.7 10.8–15.2 440 Source: World Bank staff calculations. Notes: One-time subsidy for initial on-farm CapEx cost = 50–70% of CapEx in first year; Yearly subsidy for incremental on-farm nonlabor operational cost = 20–30% of operating expenditure for five years; Complementary CSAIP-specific investments = % of total on-farm costs, depending on readiness assessment; ML = million liters; MT = million tonnes. CSAIPS must be widely disseminated to policy makers, private investors, and farmers to promote productivity increases, climate resilience, and labor release. The selected investment packages are economically viable and can deliver triple wins: increased productivity, higher income, and reduced GHGs. Higher productivity and resilience will improve the income of producers who can invest in CSAIPs and may release labor to manufacturing or value-addition services (often within the food sector). Organizing investment forums—such as the Bhutan Agricultural Trade Invest- ment Forum in May 2024—can help to support (foreign) investment in sustainable and modern agricultural practices. To foster PPPs and attract funding for essential projects, private investors must be both aware of the potential for profitable investments in priority sectors and informed that some packages are more ready to absorb investments. Widespread promotion of CSA packages also ensures that farmers are informed about the economic advantages of adopting these technologies and the need for co-financing. This knowledge transfer can also promote continuous on-farm experimentation of sustainable practices to improve agricultural productivity and climate resilience. Creating an enabling environment for investment A wide range of crosscutting investments and policy reforms are needed to create an enabling investment envi- ronment that realizes the full economic and climate potential of the CSA packages. The readiness assessment identifies and prioritizes several complementary investments and reforms in public service delivery that would help unlock the potential of CSA in Bhutan. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 47 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Immediate priority: Upgrade input, research, and service ecosystems to deliver improved varieties, hybrid cow breeds, and tailored and gender-friendly mechanization services Policy reform and support programs: Accelerating the implementation of the proposed Agricultural and Livestock Bills will help reform the restrictive regulatory framework to allow the import of modern inputs, hybrid seeds, and machinery. Bhutan can repurpose investment towards fundamental R&D, commodity standards of operations, and support systems for transferring technology from research stations to farmer’s fields, such as demonstra- tions, trials, and capacity building. The government can initiate value chain partnerships that bring together a wide range of stakeholders to inform how market demand and the private sector can inform research and cover some of the R&D costs. Public and private advisory systems: As CSAIPs introduce new sustainable production or management practices, the Ministry of Agriculture and Livestock (MoAL) can invest in the local presence, capacity, and technology of agri- cultural extension systems to promote on-farm experimentation and learning. Introducing farmer field schools and training of trainers to selected farmers could stimulate farmer-to-farmer learning and dissemination. To reduce pressure on the public extension system, introducing digital solutions and PPPs can increase private sector and youth group engagement in service delivery. Off-farm services: The public sector can take the lead in establishing climate-smart and green infrastructure to provide access to value-added, storage, and transport services at strategic locations. The MoAL can assess the economic feasibility and sustainability of the recently proposed aggregation, service provision, and export facilita- tion centers. The private sector can be trained and encouraged to manage these public infrastructures efficiently and profitably. Short-term priority: Reduce risks and transaction costs of investments Early warning and climate information: Strengthening agrometeorology systems and services would enable the translation of weather forecasts into usable farm advisories, such as the probability of pests and diseases due to high rain or the probability of drought. Investing in awareness, demonstration, and capacity building will allow the Agricultural Decision Support System to be scaled up and integrated into ongoing initiatives to provide advisory on precision farming. Smart irrigation: Reliable water access remains a challenge for rainfed production systems due to the lack of irri- gation infrastructure and proper management. Drip irrigation is proven to increase yields, promote intercropping to enhance soil fertility, and address water shortages during the lean rainfall period. The private sector, youth, and women can participate in the distribution, layout, and maintenance of new smart irrigation systems. Medium-term priority: Strengthen foundation data for programming and leverage public investments Farm registry and foundational information systems: The government subsidizes the purchase of priority inputs (seeds, seedlings, medicines) and free fertilizer delivery on a blanket basis. A farm registry would allow it to target subsidies to farmers who have demonstrated an interest in CSA, while foundational information systems can ensure food safety, certification, and traceability along the entire value chain. Concessional financing: The government can repurpose part of its public agricultural expenditures support pack- ages that directly subsidize traditional inputs to an output-oriented marketing support where provide matching grants are allocated to farmers and agrobusinesses committed to investing in CSAIPs. Such initial grant financing can make agricultural entrepreneurs more creditworthy to leverage additional commercial financing in the longer term. Performance-based grants could incentivize the local government to invest in CSA packages. As farmers are risk averse, awareness of the profitability of investing in CSA technologies and financial literacy training will help farmers while seeking subsidized loans from the Bhutan Development Bank Limited under the ongoing Economic Stimulus Program. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 48 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities 2.3. Resilient cities and infrastructure Climate change impacts on cities and infrastructure The impacts of climate change on cities will increase going forward. The Urban Climate Risk Analysis of selected cities28 conducted for this CCDR indicate an increase in extreme precipitation events over coming decades, with a heightened concentration during the wettest months and 20- and 50-year extreme precipitation events approx- imately 1.3–1.5 times more likely to occur by 2050. Wangdue Phodrang, for example, is likely to receive 90–100 millimeters of precipitation on the wettest days. Cities are also expected to face increasing drought conditions and longer warm spells.29 For example, by 2050, temperatures in Samdrup Jongkhar and Wangdue Phodrang could be as warm or even warmer than the top 10 percent hottest days under current climate conditions for half to two-thirds of the year. Cities are exposed to both pluvial and fluvial flooding, and about one-fifth of all settlements are in high flood risk zones. The urban population surged from 7.5 percent in 1974 to 44.4 percent in 2023. This trend is expected to continue, with the urban population projected to reach 57.7 percent by 2050.30 Between 1985 and 2015, built-up areas grew by 135.4 percent, and those exposed to pluvial flood hazard, by 136.9 percent. Thimphu has the larg- est built-up area exposed to pluvial flooding, while Phuentsholing is the most exposed to fluvial flooding. In most cities, spatial expansion has taken place in locations with relatively low exposure to flood risks (fast-safe growth) (Figure 22). But Dagana (not displayed in the chart) and Paro demonstrate the highest growth rates in high-risk areas (fast-risky growth). Spatial expansion in Thimphu, Samdrup Jongkhar, and Sarpang has been slow, but in high-risk areas (slow-risky growth). Figure 22. Spatial growth and exposure to flood hazards in Bhutan’s cities 700 Slow-risky growth Fast-risky growth 600 Very high risk SE growth (%) 500 400 Paro Samdrupjongkhar 300 Haa Thimphu Pemagatshel Sarpang 200 Wangduephodrang Lhuentse Chhukha Monggar Samtse 100 Punakha Slow-safe growth Fast-safe growth Trashigang Zhemgang 0 0 100 200 300 400 500 600 700 Total SE growth (%) Slope line Average growth (Bhutan) Average growth (world) Source: World Bank staff calculations. Note: For better visualization, the chart above excludes the district of Dagana, which has a total growth of 2,485 percent, while very high-risk settlements grew by 5,330 percent. 28 Gelephu, Paro, Phuentsholing, Punakha, Samdrup Jongkhar, Thimphu, and Wangdue Phodrang. 29 The analysis undertaken is of the Warm Spell Duration Index, which measures the length of heat waves in days. 30 https://data.unhabitat.org/pages/urban-population-and-demographic-trends. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 49 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Rainfall-triggered landslide hazards are a significant threat. Samdrup Jongkhar is particularly vulnerable to land- slides due to its location, heavy seasonal rainfall, irregular rainfall patterns, and terrain slope. Deforestation to create space for urban development has increased vulnerability to landslides in many cities. Landslides are not only a direct threat to human life and infrastructure; they can also reduce road connectivity, isolating communities and delaying emergency service responses. Drought conditions vary across urban areas, although predominantly dry conditions prevailed during 2011–20, as measured through precipitation and groundwater storage. Bhutan experiences heavy rainfall in the monsoon season but also faces drought due to increasingly variable rainfall and higher temperatures. In the decade from 2011, southern cities experienced drier-than-normal conditions while northern cities were wetter than normal,31 with groundwater metrics indicating a downward trend.32 The built environment in many cities also absorbs and radiates heat, generating an urban heat island effect. Incorporating climate resilience in urban and infrastructure planning Accelerating urbanization requires improved urban development planning and disaster preparedness. Bhutan’s NAP specifies that existing planning and development guidelines need to be revamped and calls for the prepara- tion of climate-resilient infrastructure master plans. The 13th FYP seeks to ensure safe and livable human settle- ments in all 20 districts (dzongkhags), with urban disaster risk mitigation and management as a key area of focus. Strengthening local resilience has been a challenge, particularly due to shortcomings in planning processes, and a lack of required data. Local governments could better incorporate resilience in local urban development planning, especially land-use plans.33 Avoiding low-density fringe growth and establishing better floodplain management regulations and zoning codes would safeguard urban populations and improve livelihoods by increasing connectivity, lowering service provision costs, and generating stronger agglomeration effects. Cities can encourage densification by promoting mixed-use land development and adjusting zoning restrictions. While the Ministry of Infrastructure and Transport (MoIT) has been developing flood management and stormwater management plans for urban areas (thromdes) and dzongkhags,34 local governments are responsible for their implementation; and due to limited budget, most have not implemented them. Planning for climate impacts on transport infrastructure is crucial. Master plans for climate-resilient infrastruc- ture are needed to ensure citizens can access transport services within and between cities despite long-term climate impacts. Cities can undertake a resilient road network assessment to identify critical segments or areas for priority investment and maintenance. Master plans can consider incorporating NBS and building on improved infrastructure design guidelines. Investing in public works can generate employment opportunities in construction and maintenance (World Bank 2021c). Cities need to engage in evidence-based crisis preparedness and response planning. All dzongkhags and thromdes have disaster management and contingency plans, but these need to be updated as they are based on qualitative assessments, are out of date, and do not identify measures specific to vulnerable groups (World Bank 2024b). As local governments maintain incomplete infrastructure inventories that lack asset values, replacement costs, and climate change adaptation and mitigation information, cities need to develop risk-informed asset management systems that consider infrastructure life cycle costs (World Bank 2024b). 31 The analysis undertaken is of the Standardized Precipitation-Evapotranspiration Index (SPEI) (SPEI-1, 12, and 48). 32 The analysis undertaken is of the total water storage anomaly, a proxy indicator. 33 Bhutan has established protocols for revising spatial planning and construction codes based on hazard assessment outcomes. It also has a National Human Settlement Policy, which guides urban development planning, albeit at a high level of generality. 34 Strategies to address urban heat have not yet been developed at local level. Local governments could establish heat adaptation plans at district and subdistrict levels, complementing the NAP’s suggested investments in green infrastructure and resilient building design regulations. Cities could also prioritize multiuse green spaces to lower urban temperatures (RGoB and World Bank 2024b). B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 50 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Box 3. The Gelephu Mindfulness City initiative The GMC, envisioned as a sustainable and livable urban hub in southern Bhutan, presents an opportunity to pilot innovative solutions to enhance resilience and livability that can then be scaled up across the country. Its relatively flat terrain and proximity to the Mao River make it susceptible to flooding, especially during the monsoon season. The Gelephu Flood Protection Project, jointly funded by RGoB and the Netherlands government, aims to mitigate such risks (MoF 2022). The Gelephu-Zhemgang national highway, a critical route for transportation and economic activity, is prone to landslides, particularly during periods of heavy rainfall (Department of Geology and Mines 2018). To achieve economic success, the GMC must incorporate climate resilience and livability into its planning and execution. Planners can use several approaches to achieve this. Integrating nature-based solutions (NBS), such as wetlands and green belts along riverbanks, can create natural buffers against flooding, enhance biodiversity, and provide recreational spaces for residents. Afforestation and reforestation projects can stabilize slopes and riverbanks, reducing risks of erosion and landslides, while urban forests and green roofs can help mitigate heat island effects and improve air quality (Box 4). Given Bhutan’s exposure to extreme weather events, building climate-resilient infrastructure and housing is vital. Designing permeable pavements and underground drainage systems can effectively manage heavy monsoonal downpours, while incorporating elevated designs and using flood-resistant materials for housing mitigate risks in flood-prone areas. Critical infrastructure such as roads, airports, and utilities should be built using robust engi- neering techniques. Fostering mixed-use urban development enhances city livability by creating vibrant neighborhoods that mini- mize commute times and promote social interaction. GMC should prioritize compact, walkable neighborhoods that integrate residential, commercial, and recreational spaces, while including community centers and multifunc- tional public spaces in these neighborhoods can strengthen cultural and social cohesion. The city is well placed to promote renewable energy and resource efficiency. Bhutan’s reliance on hydropower positions GMC to lead in renewable energy use. To complement hydropower, rooftop solar panels and microgrids could be installed throughout the city. District cooling and heating systems can reduce energy consumption while ensuring thermal comfort for residents. Water recycling systems and using treated wastewater for irrigation can further enhance resource efficiency. Finally, smart city technologies can significantly improve resource management and resilience in GMC. Deploy- ing Internet of Things sensors (a network of physical devices, vehicles, appliances, and other physical objects that are embedded with sensors, software, and network connectivity, allowing them to collect and share data) for real-time monitoring of water levels, air quality, and energy use can enable proactive responses to emerging challenges. A centralized data platform can support disaster response and urban planning, while smart mobility systems, such as electric buses and app-based public transport networks, can enhance connectivity and reduce carbon emissions. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 51 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Box 4. Nature-based solutions for urban resilience From wetlands to permeable surfaces, NBS can bolster adaptation efforts against multiple climate risks, conserving or restoring natural systems to support infrastructure (World Bank 2018). For example, community forestry programs can promote the reforestation of degraded slopes with deep-rooted species like bamboo and willow, reinforcing the soil and enhancing water infiltration, reducing surface runoff and erosion, which leads to landslides. Combining gabions—wire mesh baskets filled with rocks, concrete, or sand and soil used in civil engi- neering, road building, and landscaping—with local shrubs and grasses on slopes and riverbanks can also reduce landslide occurrences. Springshed management, which combines traditional Indigenous knowledge with scientific research for sustainable water management, is being piloted in Doghar. NBS can be effectively applied across various spatial scales and settings in and around cities, offering versa- tile and sustainable strategies for enhancing urban climate resilience. World Bank’s Catalogue of Nature-based Solutions for Urban Resilience recommends four notable approaches to NBS. Terraces stabilize steep, erosion-prone slopes, protecting urban areas from landslides and flooding while offer- ing agricultural benefits through techniques such as vegetated gabions, which enhance soil and slope stability. A prominent example is the Loess Plateau Rehabilitation Project in China, where terracing transformed degraded land into sustainable agricultural zones, improving livelihoods. Open green spaces, such as pocket parks and climate-proof gardens, mitigate the urban heat island effect, manage stormwater, and promote biodiversity. Nairobi’s Kibera Public Space Project illustrates how green spaces can inte- grate social, economic, and environmental goals, offering flood protection and fostering community-led initiatives. River and stream renaturation restores natural dynamics, enhancing flood control and biodiversity. Techniques such as stream daylighting35 and bank revegetation reconnect water courses with their ecosystems. Beijing’s Small Water Bodies Restoration Project expanded floodplains and green areas, improving urban flood resilience and creating scenic and recreational benefits. Urban forests, including phytoremediation36 forests and ecological corridors, combat pollution, regulate water cycles, and cool cities. The Freetown Tree Town Campaign in Sierra Leone demonstrates the transformative poten- tial of urban forests, combining reforestation with community-driven stewardship to combat deforestation and create employment. Source: World Bank 2023d 35 Stream daylighting is the process of restoring above-ground water flow to a stream or river that was previously buried or diverted underground. 36 Phytoremediation uses plants to clean up pollutants in the environment, by removing contaminants from the soil, water, or air, or by stabilizing them in place, reducing the risk of human and environmental exposure. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 52 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Developing and introducing a multi-hazard EWS would increase resilience in cities. Bhutan does not have a comprehensive risk monitoring system. The NCHM provides biweekly qualitative weather forecasts, but meteoro- logical stations do not have a synoptic standard, and the automatic weather stations are vulnerable to disruption due to data transmission issues (World Bank 2024c). Data is sent manually and not used to prepare forecasts. The NCHM does not operate a lightning detection network or subscribe to lightning data services and landslide risk surveillance is another important gap.37 Strengthening these systems requires significant human, technical, and financial resources, which are limited at central and local government levels. Partnerships with neighboring countries can help build capacity and provide access to relevant satellite hydromet data. Strengthening munici- pal capacity to coordinate and disseminate accessible climate information would improve EWS outcomes (World Bank 2024c). The multi-hazard EWS must be underpinned by critical digital connectivity and resilient data infrastructure to minimize service disruptions and data loss. The digital systems that play a crucial role in communicating infor- mation through early warning and evacuation notices in disaster-affected areas are housed in Bhutan’s cities but remain vulnerable to hazards. The country’s international telecommunications gateways in Phuentsholing and Gelephu are connected via cable routes through the Siliguri corridor in India, which is prone to natural disasters. Bhutan’s internet services were interrupted by Cyclone Amphan, which hit eastern India in May 2020. A third gateway under preparation in Gelephu will connect to a submarine communications cable in Bangladesh through India and is expected to provide alternative routes to connect Bhutan to the internet. But alternative technologies such as satellites and additional routes are needed to improve fallback and recovery systems. The government’s data center is situated in Thimphu, and there is a backup data center in Bumthang, with limited disaster recovery capabilities. This must be strengthened as disasters affecting the main data center in Thimphu would severely affect governmental digital services. Improved planning will require better data to understand the risks. The 13th FYP recognizes deficiencies in the country’s data ecosystem and limited use of information and communication technology in data collection. Integrat- ing DRM into urban planning requires geospatial information such as multi-hazard mapping, exposure assessments, and vulnerability assessments. Ad hoc risk assessments are conducted at sectoral and subnational levels for specific purposes, but the government has not conducted a systematic, probabilistic risk assessment for hazards such as floods across a range of infrastructure classes and sectors due to limited technical capacity. The lack of a consolidated geospatial data platform inhibits the sharing of such data. Pooling data through an interoperable data-sharing platform can lower overall costs and provide broader access to technical capacity, especially if oper- ated and maintained by a central body or technology agency. Government agencies could also draw up relevant protocols and data standards in the form of a resilience information policy to share information more effectively. Investing in climate-resilient infrastructure Infrastructure investments have a strong lock-in effect, so location choices and design and construction stan- dards need to factor in future climate risks. The analysis in this section focuses on pluvial and fluvial flooding, given the high vulnerability of Bhutan’s cities to these hazards. Table 8 presents the estimated percentage of capital damage due to urban flooding with 20-, 50-, and 100-year return periods in the historical baseline and under differ- ent climate scenarios. Historically, pluvial flooding has caused around four times as much national capital damage as fluvial flooding. Under climate change, the percentage of capital damage increases across all return periods and climate scenarios. Climate change is projected to result in an increase in capital damage associated with a 100-year flood by up to 5 percent under the SSP3–7.0 scenario for both flooding types. This increase is in addition to relatively sizeable damage already experienced under the historical baseline, especially from pluvial flooding. 37 The NCHM primarily monitors GLOF risk, though it plans to integrate flood forecasting with more lead time into its EWS (RGoB and World Bank, forthcoming). B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 53 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Table 8. Share of national capital damaged by urban floods Event and return period Historical capital damages Increase relative to historical capital damage (%) % $, millions SSP1–2.6 SSP2–4.5 SSP3–7.0 Pluvial flooding 20-year flood 6.0 3,487 8 6 9 50-year flood 7.6 4,417 6 5 7 100-year flood 8.1 4,708 4 3 5 Expected damages 0.9 523 6 9 10 Fluvial flooding 20-year flood 1.4 814 8 5 9 50-year flood 1.7 988 5 3 6 100-year flood 1.9 1,104 4 3 5 Expected damages 0.2 139 6 8 10 Source: IEc 2024 Note: The flood depths, estimated by FATHOM, a global dataset of gridded flood hazard by return period and future projection, were combined with depth-damage functions to estimate the total share of infrastructure damaged in a particular flood event, computed as a damage factor multiplied by the total dollar value of the object. An estimate of annual expected damage for a country is the sum of all magnitudes of flood events times their annual probability of occurring. Municipalities require significant investments in infrastructure adaptation. Figure 23 presents annual damage from pluvial and fluvial flooding under two adaptation scenarios. Under Adaptation scenario 1, a no-cost interven- tion that assumes new infrastructure is built outside of the historical 20-year floodplain; capital losses would reduce by 30 percent compared to the baseline by 2050. Under Adaptation scenario 2, which pairs these inter- ventions with floodproofing vulnerable buildings through retrofitting or enhanced design and building standards, capital losses are reduced by 90 percent for pluvial flooding and 50 percent for fluvial flooding from the baseline and would cost around $10.5 million and $3.5 million per year on average, respectively, by the 2040s. These scenarios highlight the potential for substantial long-term savings by combining strategic planning and targeted investments in flood resilience. Climate change is also expected to cause increasing damage to Bhutan’s road infrastructure, with associated economic losses (IEc 2024). Analysis of the repair and maintenance costs for roads shows significant impacts from forecasted changes in daily temperature, precipitation, and flooding. These impacts are projected to cost up to $45 million a year (Figure 24) and cause up to 1.8 million hours of delay by the 2040s against the historical baseline. The road linkages in the north, mainly the East-West Highway, are critical for ensuring connectivity. This is because most of the road network is in the south, so the risk of community isolation after road damage is high. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 54 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Figure 23. Expected flood damage under SSP3–7.0, by development scenario a) Pluvial flooding b) Fluvial flooding Capital damaged (%) relative to baseline Capital damaged (%) relative to baseline 0.1 0.025 0.08 0.02 0.06 0.015 0.04 0.01 0.02 0.005 0 0 2030 2040 2050 2030 2040 2050 BAU Adaptation 1 Adaptation 2 Source: IEc 2024. Figure 24. Expected cost of road repair and maintenance, by district, 2041–50 SSP2-4.5 mean SSP3-7.0 mean Damage ($1000s) per km 5 4.5 4.0 3.5 3.0 2.5 2 Source: IEc 2024. Bhutan’s bridges are particularly vulnerable to climate change. Impacts are expected to cost $60 million by 2050 for 25-year flood events, and results show large increases for both 50- and 100-year flood events across climate change scenarios (Figure 25). There are two major drivers of increased bridge impacts, depending on the district. Thimphu has many bridges that are generally built on unpaved secondary or tertiary roads and typically use a 20 or 25-year design standard. These bridges see higher incremental costs for lower flood return periods. Climate change is expected to increase the frequency of floods, driving up the impact on bridges. In Chukha and Zhemgang, there are fewer bridges; but these are built on primary roads and use a 50-year design standard and can therefore withstand lower-intensity flooding. But they are also more expensive to rebuild once destroyed because of increased span and width, and more likely to be major connections between communities, increasing the risk of isolation if damaged. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 55 2 . Strengthening resilience in key sectors: hydropower, agriculture , and cities Figure 25. Climate change impact on bridge maintenance costs, relative to historical baseline, under an SSP3–7.0 ensemble mean (USD million) 20-year event 25-year event 50-year event 100-year event 21.5 20 15 10 5 0 Source: IEc 2024. Adaptation of Bhutan’s transport infrastructure is cost-effective and significantly reduces climate-related damages and delays. Climate change scenarios and economic impact modeling demonstrate that adaptation measures applied to the road network—such as upgraded road standards, paving, and larger shoulders and culverts—reduce estimated damage by 60–70 percent and time delays by 50–60 percent. Average annual costs of the adaptation scenario38 are estimated at $1.3 million by the 2040s. The benefit-to-cost ratios are greater than one across all districts and climate scenarios. Dagana, Samtse, and Tsirang stand out as the districts with the highest benefit-to-cost ratios of adaptation interventions, where investments may be prioritized. Similarly, further investment in bridges to withstand the next-highest design event flood—for example, improving a bridge originally designed to withstand 25-year floods so it can withstand 50-year floods—would reduce the expected annual change in bridge damage from $2.6–3.9 million to $1.6–2.6 million under different climate scenarios. Interventions under such an adaptation scenario are estimated to cost $0.5 million per year, on average, by the 2040s. The government has identified nine key investments at a total cost of $13 billion to promote and improve the resilience of climate-smart cities, with the largest share of planned investment going to build resilient road infrastructure (RGoB 2023). Cities will also need to bolster services to improve resilience and protect development gains from a broad set of shocks. Equitable and robust municipal services increase the capacity of urban systems to manage climate shocks by maintaining consistent service delivery. The 13th FYP highlights the importance of “effective delivery of citizen-centric public services” through investment in “common minimum infrastructure”. Cities in Bhutan struggle to maintain or revitalize their downtown areas, as their public transport systems are weak, they face challenges in municipal solid waste disposal, and they have insufficient drainage, with storm drains often blocked by waste dumping and sewage. To ensure high access to quality services during or after a climate shock, cities will need to carry out systematic infrastructure maintenance, setting aside greater resources for operations and maintenance (O&M) to avoid capital depreciation. They can also consider making performance information available: Bhutan scored poorly on the 2023 Public Expenditure and Financial Accountability service delivery performance metric because it does not publish information on achievements. 38 Assumes that proactive climate resilience measures are implemented across the entire road network once existing infrastructure reaches its end of life or needs rehabilitation after damage has occurred. Climate resilience measures improve the ability of roads to withstand higher levels of temperature and precip- itation, as well as the magnitude of a future 50-year flooding event. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 56 3. FACILITATING THE TRANSITION TOWARD A GREENER AND MORE DIVERSE ECONOMY B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 57 3 . Facilitating the transition toward a greener and more diverse economy 3.1. Green jobs and the labor market Limited economic diversification has led to low job creation outside the public sector, with rural areas still highly dependent on agriculture. Combined with erratic rainfall, drying water sources, declining crop yields, and increasing land degradation, this has weakened the viability of rural livelihoods. Rural outmigration is rising, partic- ularly among youth and men, contributing to labor shortages in agriculture (Katel et al. 2024). Although available research does not yet reveal a strong correlation between migration and climate events, emerging evidence from climate-vulnerable districts suggests an indirect link: climate impacts are undermining agricultural returns and prompting farmers to abandon land, contributing to food insecurity and an increase in empty houses (gungtongs).39 Supporting economic diversification—especially in green and labor-intensive sectors—and strengthening rural resilience will be critical to address the underlying drivers of migration and build adaptive capacity while creating new jobs in the non-agriculture sectors. The dynamics of the labor market, analyzed through the lens of green jobs, helps identify opportunities for green structural transformation going forward. The country’s relatively small private sector limits the creation of nonagricultural jobs. As a result, diversifying and generating higher value-added employment opportunities is a challenge. Structural transformation and economic diversification will drive changes in labor demand, which in turn will influence labor supply—for example, through changes in relative wages. Conversely, labor supply can also drive changes in labor demand, as seen in some South Asian countries, such as India and Pakistan, where the surge in skilled technology freelancers contributed to a boom in the software development sector (World Bank 2021b). At the same time, a lack of qualified workers risks slowing down structural change. Using a network anal- ysis to examine labor supply in Bhutan, this section identifies opportunities that can support diversification while creating green job opportunities. There is no universal definition of green jobs, and the types of workers needed to support the transition is specific to each country and its unique development experience. For example, most jobs in the services sector supporting ecotourism are typically not considered green, but they can play a crucial role in structural transfor- mation by providing opportunities to transition from nongreen sectors—such as traditional manufacturing—to more sustainable and environmentally friendly industries.40 In contrast, while all occupations related to renew- able energy are considered green, not all of them are relevant to Bhutan. Recognizing these limitations, this analysis applies the European Skills, Competences, Qualifications, and Occupations (ESCO) definition of green tasks to identify green jobs. The ESCO database includes almost 14,000 skills that are linked to more than 3,000 occupations. Among these, those that involve “the knowledge, abilities, values and attitudes needed to live in, develop and support a society which reduces the impact of human activity on the environment” are clas- sified as green (ESCO technical report). Applying this definition to both the workers sought by employers (labor demand) and the jobs sought by workers (labor supply) can help identify opportunities and mismatches to inform supply-side interventions, such as training programs, and demand-side interventions, such as sector-specific policies and incentives. 39 http://weadapt.org/?case-study=climate-change-agriculture-and-internal-human-mobility-in-the-bhutan-himalayas. 40 According to the ESCO definition used in this analysis, many occupations in tourism—such as those in hotels, restaurants, and so on—are not typically recog- nized for their contributions to preserving or restoring environmental quality. This is partly because occupation classifications do not differentiate between ecofriendly and non-ecofriendly service roles. But these occupations can play a significant role in a country’s green structural transformation. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 58 3 . Facilitating the transition toward a greener and more diverse economy The network of occupations in Bhutan Bhutan’s network of occupations demonstrates a lack of diversification, with skills and employment mostly concentrated in lower-skilled occupations. The occupational landscape (or network of occupations) is shown in Figure 26, with each node representing an occupation and the nodes linked together based on task similarity. Occu- pations with greater task similarity are positioned closer together, while those with less similarity are located further apart. Higher-skilled occupations, associated with higher levels of education and better wages, are predominant in the left and upper-right regions, while lower-skilled occupations are concentrated in the lower-mid and lower-right regions. This clustering suggests that high-skilled occupations involve relatively similar tasks and shared compe- tencies.41 However, the node size, which represents the level of employment, reveals that these occupations do not constitute a large portion of the workforce. A majority of the workforce is employed in lower skilled occupations, especially in agriculture (indicated by the large blue nodes). Other occupations, such as shopkeepers, teachers, construction laborers, vehicle drivers, and religious professionals, also account for a substantial number. Figure 26. Occupations and employment in Bhutan Restaurant Mixed crop and managers animal producers Mixed crop growers Shopkeepers Business services Police officers and administration managers Electrical engineering technicians Secondary education teachers Primary Carpenters school and joiners teachers Midwifery professionals Pest management workers Employment 60,000 20,000 Wood processing plant operators 2,000 100 Religious associate Car, taxi and Building construction Handicraft workers in textile, professionals van drivers laborers leater and relalted materials Unknown Source: World Bank staff calculations, using occupational similarity scores from Arakaki et al. 2022 and NSB 2022 labor force survey of Bhutan. Notes: NSB (2022) does not use post-stratification estimation. As a result, the total weight of employed workers is 288,675, which is lower than the 400,755 reported in 2022 in the World Development Indicators database. Nodes are colored according to their one-digit occupation family. Green skills in Bhutan are primarily concentrated in high-skilled occupations, but the overall prevalence of green employment is relatively low. Some of the scarcest green skills42 include designing solar energy systems, while the least scarce involve compliance with environmental legislation and hazardous waste disposal. Green skills are particularly common in high-skilled occupations, such as managers, professionals, and skilled agricul- tural and forestry workers (Figure 27). In the occupational network, green jobs are concentrated in the central and 41 For example, senior government officials and urban planners, both high-skilled professions, share tasks such as liaising with local authorities, communicating in different languages, and applying civic skills. Low-skilled workers also tend to exhibit commonalities in their tasks—for example, wood treaters and indus- trial firefighters share several tasks, such as disposing of hazardous waste, working safely with chemicals, and inspecting industrial equipment. 42 To determine the ‘greenness’ of an occupation, the ESCO database is used to calculate a green score for each occupation. Greenness of occupation is estimated as the sum of its green skills, weighted by scarcity, defined as the inverse of the number of occupations requiring a green skill. ESCO is aligned with the International Standard Classification of Occupations and Bhutan Standard Classification of Occupations at the four-digit level. The database includes almost 14,000 skills linked to more than 3,000 occupations. Among these skills, some are classified as green, such as “train staff to reduce food waste” or “install heat pump”. An ESCO skill is linked to an ISCO occupation if at least one of its corresponding, more detailed ESCO occupations requires that skill, whether as optional or essential. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 59 3 . Facilitating the transition toward a greener and more diverse economy upper-right regions, which include occupations in agriculture, forestry, and technical fields (Figure 28). Occupa- tions with a high number of green skills, such as environmental protection professionals and engineers, make up a small portion of the workforce. For most occupations, green skills are optional.43 For example, civil engineers in traditional construction projects focus on structural integrity, project management, and compliance with basic regulations without an emphasis on sustainability. In contrast, civil engineers involved in ecofriendly city planning require green skills to ensure energy efficiency, waste reduction, and sustainability in urban environments. Figure 27. Average number of green skills by occupation group 9. Elementary occupations 8. Plant and Machine operators, and assemblers 1. Managers 7. Craft and related trades workers 6. Skilled Agricultural, Forestry, 2. Profesisonals and Fishery workers 5. Service and sales workers 4. Clerical support workers 3. Technicians and associate professionals Figure 28. Greenness of employment in Bhutan Engineering Farming, forestry, professionals, other Manufacturing and fishery advisers Civil engineers managers Policy and planning managers Mechanical engineers High Policy administration professionals Geologists and geophysicists Environmental protection professionals Low None Environmental and occupational health Tree and shrub Plumbers and inspectors and associates crop growers pipe fitters Source: World Bank staff calculations, using similarity scores from Arakaki et al. 2022, NSB 2022, and the ESCO (v1.2.0) database. Note: Occupations with no green skills (34 percent of total occupations) are represented by red nodes while those with at least one green skills, are in shades of white and blue. The intensity of the blue color indicates the number of green skills. 43 ESCO distinguishes between essential and optional skills. The former are the skills or competences that are crucial for performing a specific occupation and are typically required by employers. The latter are additional (nonmandatory) skills that can enhance a person’s ability to perform the job. They reflect the diversity of jobs within the same occupation and can be important for job matching. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 60 3 . Facilitating the transition toward a greener and more diverse economy Occupations sought by workers High-skill occupations exhibit higher unemployment rates. Figure 29 illustrates the distribution of jobs sought by unemployed workers with higher education, with the color of nodes representing the ratio of unemployed workers seeking a job in each occupation relative to the number of employed workers in the same occupation.44 Several occupations—such as civil engineers, farming, forestry, fishery advisors, and accountants—have unemployment rates (ratio of unemployed workers to total number of workers, both employed and unemployed, in that occupa- tion) exceeding 20 percent. More than a quarter of unemployed workers (those currently unemployed but willing to accept a job if offered) have completed higher education (NSB 2022).45 The nascent private sector development is reflected in establishments primarily demanding low-skilled workers, particularly hairdressers, rubber product makers and machine operators, and shop sales assistants. Figure 29. Prevalence of unemployed workers in Bhutan, by occupation Software Civil developers engineering Information and technicians communications technology Electrical service managers engineers Civil High Accountants engineers Secondary education teachers Chemists Nursing professionals Low Missing Protective services Farming, forestry, and workers fishery advisors Source: World Bank staff calculations, using similarity scores from Arakaki et al. 2022 and NSB 2022. Unemployed workers are actively seeking green employment, indicating untapped potential in sustainable sectors. Comparing the green jobs analysis with the jobs sought by unemployed workers reveals that many are targeting green occupations. Across all such occupations, more than 5 percent of those with higher-than-average greenness have unemployment rates exceeding 15 percent (Table 9). The highest rates are among civil engineers (33 percent); farming, forestry, and fisheries advisors (32 percent); and civil engineering technicians (24 percent). This highlights significant untapped potential, as civil engineers play a key role in the green transition across multi- ple sectors, from renewable energy to water supply, construction, and transportation. 44 Occupational unemployment for high-skilled workers is inferred by identifying the occupations of employed workers for each combination of qualification and field of study. This information is then used to determine potential occupations for unemployed workers with the same educational background, serving as a proxy for the occupations sought by high-skilled unemployed workers in Bhutan. 45 This includes qualifications such as certificates, diplomas, bachelor’s degrees, postgraduate diplomas, master’s degrees, or PhDs. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 61 3 . Facilitating the transition toward a greener and more diverse economy Table 9. Unemployment rates in the top 10 green occupations Code Occupation Unemployment rate (%) 2149 Engineering professionals, other 5 2133 Environmental protection professionals 20 2144 Mechanical engineers 6 2142 Civil engineers 33 1213 Policy and planning managers – 2132 Farming, forestry, and fisheries advisors 32 2131 Biologists, botanists, zoologists, and related professionals – 2143 Environmental engineers – 1321 Manufacturing managers 8 3112 Civil engineering technicians 24 Source: World Bank staff calculations, using data from NSB 2022 and the ESCO (v1.2.0) database. The overlap between the occupations demanded by employers and those sought by workers highlights Figure 30. Unweighted correlation heatmap mismatches, particularly in green occupations, and shows a disconnect between job demand and worker Sought-after jobs 1.00 -0.09 -0.03 0.20 0.21 1.00 expectations. Figure 30 illustrates correlations between sought-after occupations, expected vacan- Expected vacancies -0.09 1.00 -0.08 -0.13 -0.05 0.75 cies, and three definitions of green jobs. It reveals a Greenjobs (GTI narrow) -0.03 -0.08 1.00 0.61 0.20 0.50 weak positive correlation between sought-after occu- pations and two of the three green job definitions. Green jobs (GTI broad) 0.20 -0.13 0.61 1.00 0.27 0.25 While the correlation is not strong, it includes several Green jobs (ESCO) 0.21 -0.05 0.20 0.27 1.00 0.00 engineering professions that are essential for the Sought-after jobs Expected vacancies Greenjobs (GTI narrow) Green jobs (GTI broad) Green jobs (ESCO) green transition across various sectors. In contrast, -0.25 the correlation between green jobs and expected -0.50 vacancies is slightly negative across all three defi- nitions suggesting that while workers are seeking -0.75 some green jobs, vacancies tend to be in nongreen -1.00 occupations. Source: World Bank staff calculations, based on Granata and Posadas (2024) The following key messages emerge from the analy- Green Task Intensity (GTI) index. sis. First, based on available definitions, green skills Note: The GTI index differs from the ESCO definition of green tasks in that it quantifies the green task content of occupations by applying text analysis are particularly concentrated in high-skilled manage- to task statements from the ISCO-08 database, using a green dictionary (a rial, professional, and technical roles, which represent database of terms considered ‘green’). Two versions of the GTI index are computed: GTI narrow and GTI broad, with the latter encompassing a wider only a small share of Bhutan’s employed workforce. range of green terms. Second, other sectors, including those employing B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 62 3 . Facilitating the transition toward a greener and more diverse economy lower-skilled workers, also have potential to drive growth and reduce reliance on traditional sectors such as agri- culture. For example, ecotourism could play a critical role in green structural transformation, even though most jobs supporting this sector are not typically classified as green. Third, despite many high-skilled unemployed work- ers seeking green occupations, employers predominantly demand low-skilled workers, with most job vacancies concentrated in nongreen sectors. Developing and implementing green skills training programs for both high and low-skilled workers can ensure supply of the right skills. Introducing targeted training for highly skilled occupations that are essential in a green economy would help leverage existing skills in the workforce. Collaborating with educational institutions and industry stakeholders would ensure the curricula align with the needs of a green economy. Developing short-term or on-the- job green skills training, including for low-skilled workers, can increase the supply of skills demanded by the market. Leveraging industrial parks as hubs for sustainable production and green job creation can create the demand for green jobs. Employment creation can be supported by promoting the development of green industries, for exam- ple, through targeted financial support and policy measures. This approach can also help address labor market mismatches by using the skills of workers already seeking green jobs. RGoB has established four industrial parks and two industrial estates, with support from the governments of Japan and India (World Bank 2021a, 2019a). These parks have the potential to attract FDI and enhance export competitiveness, particularly in agriculture, wood, minerals, and chemicals. While they have faced challenges—including low occupancy levels and incon- sistent private sector engagement—these industrial parks hold significant potential for strengthening nonhydro exports and supporting more sustainable industrial production models. Bhutan has a comparative advantage in niche markets, where smaller-scale, specialized production can be more competitive. Industrial parks can offer plug-and-play facilities for micro, small, and medium-sized enterprise (MSMEs) to help address key constraints for firms aiming to export specialized products, provide shared facilities, such as wastewater treatment plants, and foster synergies between firms—for example, by reusing waste heat and other byproducts—to address market failures related to environmental sustainability. Bhutan can draw on the international Eco-Industrial Park Frame- work (UNIDO, World Bank and GIZ 2021) to guide the sustainable development of these parks. Continuous monitoring of labor market trends can facilitate skills matching. Regular labor market assessments can help identify skills gaps and ensure training programs align with the needs of both workers and employers. Implementing a robust labor market information system can facilitate better communication between job seekers and employers, ensuring skills match market demand. 3.2. Green transition of the tourism sector Tourism has been an important economic driver, leveraging Bhutan’s exceptional cultural and natural assets. Modern tourism in Bhutan is considered to have begun in 1974, when the country received 287 visitors. The sector was privatized in 2001, with a strong offer around cultural assets. From 2009, Bhutan witnessed a remarkable growth in tourist numbers, peaking at 315,599 in 2019.46 The sector primarily caters to visitors from the United States, United Kingdom, China, Germany, Singapore, France, Italy, Malaysia, Vietnam, Australia, and Canada, with 86 percent of visitors traveling for cultural experiences. Tourism has traditionally generated revenue via a unique business model, charging individual tourists a sustainable development fee as part of a minimum daily rate package. 46 https://www.dailybhutan.com/article/bhutan-set-to-raise-sdf-to-200-$. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 63 3 . Facilitating the transition toward a greener and more diverse economy Tourism is a pillar of employment, generating nearly two in every 10 jobs by 2019. Total employment in Bhutan reached 314,562 in 2019 (NSB 2020), with 52,264 (16.7 percent) categorized as direct and indirect tourism employment by the Tourism Economic Census (Tourism Council of Bhutan 2021; Table 10). Women hold 35.8 percent of all tourism jobs. Accommodation, food, and beverage/entertainment establishments employ more than half (53.6 percent) of all tourism workers. In 2019, tourism GDP amounted to Nu 16,967 million, or 10 percent of GDP (Tourism Council of Bhutan 2022). Table 10. Tourism employment, by establishment type (2019) Establishment type Tourism employment Accommodation 14,728 Food, beverages, entertainment 13,324 Transport operators, tour and travel agencies, reservation services 22,218 Health and wellness 460 Other tourism activities 1,534 Total 52,264 Source: Tourism Council of Bhutan 2021 Note: Tourism employment includes both direct and indirect employment. In total, 26,087 individuals were directly employed in tourism establishments in 2019, and 26,087 are estimated to be indirectly employed by the sector, using an employment multiplier effect of 2. Impacts on climate change Transport remains a significant climate change contributor in Bhutan’s tourism value chain. Globally, the sector’s share of GHG emissions was 8–11 percent in 2019 (WTTC 2021); it is predicted to account for 12–27 percent of global emissions by 2050 (UNTWO 2019). Within the global tourism value chain, transport makes up at least half of all emissions, but this varies by country (World Tourism Organization 2024), with estimates suggesting that aviation, vehicular travel, and other transport contributes to nearly 50 percent of the carbon footprint of global tour- ism.47 Despite increasing tourism arrivals (Figure 31), GHG emissions for Bhutan’s aviation activity were generally stable from 2012 and 2020. A comparison of GHG emissions from bunker fuels for aviation and shipping illus- trates that Bhutan’s GHG emissions related to air transport are relatively flat compared to Bangladesh, Myanmar, and Nepal (Figure 32). There are several ways Bhutan can mitigate the impacts of air transport. As well as using sustainable aviation fuels derived from renewable sources, the air industry can achieve operational efficiency by increasing the number of direct routes (Rowland 2022), reducing unnecessary idling, and improving air traffic management to decrease fuel use and contribute to lower emissions.48 Modernizing fleets with next-generation planes that use lighter mate- rials and sustainable fuels, and have advanced aerodynamics, significantly reduce carbon emissions. 47 https://sustainabletravel.org/issues/carbon-footprint-tourism. 48 https://www.iata.org/en/youandiata/travelers/environment/. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 64 3 . Facilitating the transition toward a greener and more diverse economy Figure 31. Bhutan’s aviation activity, 2014–23 Figure 32. GHG emissions from aviation and shipping fuels, 2012–20 International Seats vs Estimated Passenger Arrivals Greenhouse gas emissions from bunker fuels 400,000 (aviation and shipping), 2012-2020 2,000,000 Tonnes of carbon dioxide equivalent 300,000 1,500,000 200,000 1,000,000 100,000 500,000 0 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2012 2014 2016 2018 2020 Seats (Total) Total Est. Pax Bangladesh Bhutan Myanmar Nepal Source: OAG and Climate Watch. The transport sector contributes approximately 15 percent of total emissions, with road transport accounting for 98 percent of all transport emissions. While they may be small on a global level, transport emissions can pose a significant threat to Bhutan’s status as a carbon-negative country. Addressing the challenges within the trans- port sector underscores the need to deliver improved connectivity in a low-carbon, climate-resilient manner. RGoB has recently developed several sector strategies and a low-emission transport master plan for Thimphu. Surface transport dominated by gasoline-powered vehicles has increased air pollution and GHG emissions, contributing to high air pollution levels in some valleys. The Environmental Performance Index ranks Bhutan 139 out of 180 countries in terms of contribution and exposure to air pollution (EPI 2024). Bhutan’s second NDC is an encour- aging step toward reducing emissions in the surface transportation sector. Further adoption of electric vehicles (EVs), as outlined in the country’s EV roadmap (2020–25), will enable cleaner travel options. But this policy has trade-offs that need to be carefully considered (Box 5). Bhutan has made an important step in the accommodation sector to support climate change mitigation. The Tourism Council of Bhutan, Association of Bhutanese Tour Operators, Department of Tourism, and United Nations Development Programme (UNDP) collaborated to establish Bhutan’s Green Hotel Standards in 2023, a foundational step toward defining and guiding green hotel characteristics and activities. Defining measurement and monitoring specifics to assure compliance and substantive contributions to climate-sensitive practices are the next steps for Bhutan’s public and private sectors to make these standards fully operational (Bhutan Standards Bureau 2023). Incorporating resilience parameters in the country’s building standards to reduce exposure to hydrometeorological hazards would also promote sustainability in the accommodation sector. Certification programs, such as those developed by the Global Sustainable Tourism Council, can support destinations and businesses with a frame- work and guidelines to promote environmental stewardship, corporate social responsibility (CSR), and economic viability to mitigate climate changes. Sustainable tourism jobs could play an important role in structural reform, as many of the skills required for this sector are already present in the labor force. According to the 2022 Labor Force Survey, 6.1 percent of employed workers are classified as tourism workers (NSB 2022).49 Most skills used in the sector are not sector-specific, 49 Although many workers support tourism, to identify tourism-specific skills, a narrow definition of tourism workers is adopted. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 65 3 . Facilitating the transition toward a greener and more diverse economy Box 5. Support for EV adoption Bhutan has launched several initiatives to support EV adoption in line with its EV roadmap (2020–25), which sets the goal of replacing 70 percent of annual vehicle sales with EVs by 2035. The government has invested in free public EV charging infrastructure, import duty and sales tax exemptions for EV purchases, and aims to tran- sition all government vehicles to EVs. An incentive program provides subsidies for taxi drivers to upgrade to EVs, and the EV roadmap estimates that between 2020 and 2035, public support to the national EV program will be equivalent to $36 million.  The program to subsidize EV adoption among taxi drivers involves significant trade-offs. Under the policy, taxi drivers receive a 20 percent subsidy on the cost of an EV, with a maximum ceiling of $5,500, and a 70 percent loan facility, so they pay just 10 percent of the costs upfront. The government is targeting 300 EVs with this incen- tive program to serve as a pilot and raise awareness of the benefits of EVs. As taxis have a stronger business case for EV adoption, due to higher daily mileage and greater fuel savings potential, this policy may be justified. But, together with the subsidized charging infrastructure and foregone tax revenues for EV purchases, the level of government support for EV adoption is significant. Although many other countries, such as the European Union, United States, and China, provide EV subsidies, this is typically pursued as an industrial policy to support the domestic EV manufacturing industry, which may help create an economic case for such demand-side measures. But EV manufacturing is not an objective in Bhutan, so the opportunity costs associated with such subsidies need to be reassessed. As the Low Emission Development Strategy for Surface Transport (2021–50) emphasizes, EV promotion needs to be embedded in a broader strategy that also covers important adjacent policy matters. In 2014, a program designed to introduce EVs failed due to a combination of high purchase costs, limited charging and servicing infrastructure, and low public trust in the technology (WEF 2020). To reduce the burden on the public budget and develop financially sustainable EV business models, the government can explore ways to enable private invest- ments in charging infrastructure. Beyond financial constraints, the government needs to tackle further issues, such as the lack of qualified technicians and repair facilities, and expensive spare parts that have to be imported. The government has already taken steps to address the shortage of EV technicians with dedicated training programs. The expansion of EVs also brings up additional regulatory issues, such as the need for frameworks governing EV battery and component recycling and waste management. Overall, there is scope to carefully consider the cost-effectiveness of its support to passenger EV adoption to achieve climate goals and road congestion issues. A multimodal approach to road transport decarbonization, including shared mobility, e-bikes, walkable cities, and emissions standards for combustion engine vehicles, will effectively complement the push for EV adoption and achieve transport decarbonization. suggesting that the current workforce is well positioned to support growth (Figure 33). Some specialized skills, such assembling visitor supplies and accompanying guests, typically involve practical and customer service abil- ities, which can be developed through short-term training or on-the-job experience, rather than extensive formal education. Bhutan has made efforts to brand and manage its cultural heritage sites. According to UN Tourism, cultural tourism accounts for 40 percent of global tourism spending and is dominated by United Nations Educational, Scientific and Cultural Organization (UNESCO)-listed cultural heritage sites. Bhutan first submitted four cultural heritage properties to UNESCO in 2012 and now has eight entries on the Tentative World Heritage list. In 2022, B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 66 3 . Facilitating the transition toward a greener and more diverse economy Figure 33. Skills required by tourism workers in Bhutan, sized by number of workers using the skill Share of tourism in all jobs requiring skill 0% 25% 50% 75% 100% planning events and programs monitoring financial designing and economic structures facilities resources and activity serving food accompanying and and drinks welcoming people driving light vehicles performing and entertaining assemble visitor supplies Source: World Bank staff calculations, based on data from the ESCO (v1.2.0) database and NSB 2022. Note: Skills are colored based on the proportion of tourism workers among all workers requiring each skill and sized by the number of workers using the skill. The diverging point of the color bar represents the average proportion of tourism workers over all skills. the Department of Culture launched Bhutan’s first-ever cultural heritage database system to document significant heritage sites and manage the inventory of Bhutan’s cultural landmarks (MoHCA 2022). These steps to protect and conserve heritage can be undertaken in tandem with tourism and climate change mitigation and adaptation agendas. With cultural heritage offerings integral to Bhutan’s tourism brand, protecting and managing its assets in the face of increasing climate risks is paramount. High seasonality and geographic concentration of visitors—77 percent of all visitor nights are concentrated in Paro, Thimphu, and Punakha—exacerbates tourism visitation pres- sure on popular destinations. Bhutan has the potential to become a popular adventure tourism destination. Hiking, trekking and walking, culi- nary/gastronomy, cultural, safaris/wildlife viewing, electric cycling, and wildlife/nature photography were identified as top trending activities in the global adventure tourism market (ATTA 2024). Bhutan provides a range of activities, including Himalayan trekking and hiking, and has over 20 designated hiking trails ranging from short walks to multi- day treks and catering to different levels of experience. It is ranked 61st out of 180 countries in the forthcoming edition of the Adventure Tourism Development Index, which analyzes the competitiveness of countries’ adventure tourism industries. A survey among industry experts ranked Bhutan 1st for cultural resources, 4th for safety, and 17th for natural resources, despite ranking 121st for infrastructure and enabling environment. Adventure tourism is a proven mechanism for generating green jobs that honor local values and support climate change mitigation. Climate-sensitive use of protected and rural areas requires proactive policies and attentive management to achieve lasting benefits. Growth in Bhutan’s adventure tourism presents an opportunity to gener- ate climate-friendly jobs while aligning with the country’s rich natural and cultural resources. The 13th FYP states that green growth can be facilitated via the “introduction of innovative eco-tourism and nature recreation products and service charges in protected areas for the use of recreational facilities” (RGoB 2023c). B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 67 3 . Facilitating the transition toward a greener and more diverse economy Wellness tourism is an emerging opportunity that Bhutan has yet to fully leverage. Defined as travel associ- ated with the pursuit of maintaining or enhancing one’s personal well-being, wellness tourism has emerged as the second-largest segment of the world’s growing wellness economy. Wellness travelers are typically more affluent, educated, well-traveled, and willing to spend more on travel experiences (Global Wellness Institute 2023), spend- ing an average of $1,764 per trip in 2022, which is 41 percent more than the typical international tourist. Growing demand globally and regionally for locally defined wellness services and products that are integral to the climate, environment, and culture provides an opportunity for Bhutan. Wellness experiences help improve mental health and overall sustainability for both visitors and locals (Park et al. 2021). Bhutan offers some traditional wellness products and services in limited settings that are valued by tourists and locals alike, but this sector is underdevel- oped and underused compared to growing global demand. A focused effort by both the public and private sectors can develop wellness tourism that builds on and reinforces traditional practices while protecting the environment. 3.3. Realizing the economic potential of forestry Contribution to economic growth Bhutan’s forests are a critical part of the country’s ecosystem services. Providing timber, non-timber forest products (NTFP), and freshwater regulating services through carbon sequestration, soil conservation, and climate regulation, forests contribute significantly to both local and national well-being. The estimated annual value of these ecosystem services is approximately $14.5 billion (2013), accounting for about 93.8 percent of total natu- ral capital, which is valued at around $15.5 billion.50 Benefits from forests extend beyond local communities; approximately 53 percent of total benefits accrue to people outside Bhutan, indicating the global importance of these ecosystems. The annual benefits from ecosystem services are estimated at $15,400 per capita, signifi- cantly surpassing the contributions captured in GDP . NTFPs, such as bamboo, mushrooms, and medicinal plants, contribute to household incomes and have potential for export. Bhutan is home to around 400 species of medicinal and aromatic plants, which are increasingly recog- nized for their economic potential. Many forestry-related activities can account for up to 25 percent of income for the poorest households in rural areas, while in some highland communities, collecting and trading rare species, such as the highly valued fungus Cordyceps, can constitute up to 50 percent of annual income (World Bank 2019b). But on average, forest income makes up less than 3 percent of income across all rural households—much lower than other forested countries, such as Indonesia, where it is 22 percent (World Bank 2019b)—indicating untapped potential. Timber contributes to local economies through direct sales and as a raw material for wood-based industries. Timber production is managed under strict regulations to ensure sustainability. Forest resources are currently underused, and there is limited private-sector involvement. Only 5 percent of the country’s forest area is used for commercial production, and 11 percent of the forest area outside protected areas has potential for commercial forest management without compromising forest health (World Bank 2019b). With the rise in demand for sawn timber and processed wood products in both national and international markets, Bhutan’s valuable forest resources can be transformed into a sustainable source of income and employment by expanding the area under sustainable management and enhancing the rate of timber processing. Despite its large forest cover, wood and paper articles, wood charcoal, and similar products account for around 5 percent of imports, while wood products constitute less than 1 percent of exports. This points to the potential for import substitution by increasing domestic production, processing, and value addition. At only 2 percent, the contribution of forests to GDP is lower than other forest-rich countries such as Gabon, the Democratic Republic of Congo, and Finland (4, 5.1, and 4.4 percent, respectively). 50 47 CIFOR/AusAID (undated): SLANT Project Brief - Forest Ecosystem Services in Bhutan. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 68 3 . Facilitating the transition toward a greener and more diverse economy Outdated forest-related industries have limited capacity to efficiently harvest and process wood and nonwood resources, severely limiting revenue potential and job creation capacity. Forest management in Bhutan primarily focuses on extracting raw materials with limited processing, value addition, and diversification, and a high (50–60 percent) wastage rate in sawmilling. Challenges facing forest-based industries include high transportation costs, a lack of integration and coordination, limited skilled labor, outdated technology, limited market access, and compe- tition from cheaper imports from neighboring countries. The absence of modern wood processing technologies and sustainable forest management practices limits the country’s potential for developing competitive wood and nonwood industries. The absence of a market-based system for allocating wood resources results in subsidized provision that under- mines the development of commercially viable wood-based enterprises, limiting market-based solutions. The fixed timber pricing system limits competitiveness and discourages private sector participation, hindering the development of vibrant wood-based industries. This situation is exacerbated by a generally weak business envi- ronment. Despite efforts to address them, significant challenges remain in starting businesses, obtaining permits, and resolving insolvency (World Bank 2020a). Various institutions are involved in forest management, leading to inefficiencies. The Forest Department is responsible for resource management, while timber extraction is largely handled by the Natural Resource Devel- opment Corporation Limited. Although Bhutan has established a robust legal framework for forest conservation, including the Forest and Nature Conservation Act of 1995, gaps remain in enforcement and compliance. For exam- ple, while timber sales are regulated to ensure affordability, quantities marketed are poorly documented. Weak institutional capacity, including a shortage of skilled personnel and limited resources for enforcing regulations, present challenges. The National Forest Policy emphasizes local community involvement, but its effectiveness is often undermined by insufficient capacity building for community forest management groups and gender imbal- ances within these groups. Key climate change impacts on forests include shifts in forest composition and biodiversity, increased forest fires and pest outbreaks, stressed water resources, and soil erosion. Climate change alters habitat ranges and species composition in the country’s forests. Some species may migrate to higher elevations or face increased competition from invasive species, potentially leading to a reduction in biodiversity (MoAF 2020). Warmer tempera- tures and changing rainfall patterns also create conditions that are favorable to forest fires and pest infestations. In recent years, forest fires have increased in both frequency and intensity, damaging significant areas and releasing carbon emissions (Rai, Wangchuk and Dorji 2019). The bark beetle and other pests thrive under warmer conditions, posing a serious threat to forest health and timber productivity (Dorji 2021). Deforestation due to climate-induced stress also increases soil erosion, affecting agriculture and infrastructure downstream (Wangchuk and Tobgay 2020). Unplanned infrastructure development is an important driver of forest degradation, while illegal logging and unauthorized timber extraction, which are seemingly widespread, exacerbate this challenge. Balancing conservation goals with economic objectives Greater forest use in Bhutan offers a transformative opportunity to achieve multiple interlinked objectives: foster- ing economic growth, promoting rural development, and enhancing environmental conservation. By embracing sustainable forestry practices, Bhutan can unlock the full potential of its extensive forest resources while uphold- ing its commitment to environmental stewardship. To realize the sector’s full potential, Bhutan needs to balance conservation goals with economic development objectives. A multifaceted approach is required, involving policy and governance reforms, access to finance, capacity building, investments in technology and infrastructure, and awareness-raising initiatives. Through sustainable forest management, Bhutan can increase timber yield without jeopardizing ecosystems and ecosystem services. To increase timber extraction at forest management units, and therefore output per hect- are, several interventions are required to improve management practices, adopt technological advancements, and B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 69 3 . Facilitating the transition toward a greener and more diverse economy increase community engagement. Developing and implementing comprehensive forest management plans that adhere to the annual allowable cut would improve forest management practices, as inadequate planning, equip- ment issues and other constraints prevent many forest management units from meeting their annual allowance. Thinning operations in overcrowded forests would improve overall forest health and increase timber yield, particu- larly in blue pine forests, while upgrading outdated harvesting equipment and investing in new technologies would improve extraction efficiency and minimize environmental impact. Training programs can enable timber harvest- ing personnel to effectively implement reduced-impact logging techniques that align with sustainable practices, while community forestry and stronger community forest management can empower local populations to manage resources sustainably while meeting their timber needs and enables better local oversight and resource use.51 There is also scope to implement a market-based approach to timber, which would enhance efficiency, promote sustainability, and increase job creation and economic benefits for local communities and enterprises. This will involve transitioning from fixed prices to auction-based pricing, allowing market forces to determine timber prices based on demand and supply. This auction system can help reflect true market values and incentivize producers to adopt sustainable practices. The transition can be managed by rationalizing forestry policies to accommodate auction-based pricing and ensuring stakeholders understand their rights and obligations under the new system. Incorporating sustainable forest management principles into the auction framework can ensure that only sustain- ably harvested timber is sold. This could involve certifications or adherence to specific environmental standards for buyers. Developing digital platforms to connect timber producers with potential buyers can provide transparency in pricing and availability while enabling broader market access. Fostering PPPs in timber production and process- ing between government agencies, private players, and local communities can improve resource management, enhance economic opportunities, and facilitate job creation. There are significant development potential in value-added wood products and NTFP value chains. Promoting small-scale enterprises and establishing small-scale timber and furniture-making industries can support local economies, while investing in technology to modernize production techniques will improve efficiency and product quality, making Bhutanese products more competitive in domestic and international markets. Diversifying NTFP value chains and expanding the production and marketing of high-value NTFPs—such as medicinal plants, bamboo products, and wild mushrooms—can provide significant income sources for rural communities but needs to be complemented by research into domestication and sustainable harvesting practices. Facilitating market access by establishing connections with national and international markets will help local producers sell their NTFPs effectively. This includes branding, labeling, certification, establishing consumer and buyer interfaces and market- ing platforms, and exploring niche markets that value organic and sustainably sourced products. Market access can be gained by enhancing the visibility of forest products through trade fairs, online platforms, or partnerships with large companies that are looking to source sustainable products. Developing ecotourism initiatives linked to forest conservation can provide additional revenue streams for private investors and promote sustainability, while payment for ecosystem services and encouraging research into new forestry methods, species suitable for plantations, and value-added products can enhance the viability of private forestry operations. Promoting private sector participation is essential, and Bhutan can take several steps to create an enabling environment for forest-based small and medium-sized enterprises (SMEs) through access to finance, technol- ogy, and skills development. Establishing clear policies that outline the role and responsibilities of private enti- ties in forestry and timber processing would create a comprehensive framework for private sector investment 51 Since the inception of community forestry in Bhutan, there has been significant growth in the establishment of community forestry management groups, and in 2020, over 780 community forests covering approximately 92,000 hectares were managed by more than 32,000 households. These groups are empowered to manage their forests sustainably, increasing access to timber and NTFPs while fostering environmental stewardship. For example, to resolve long-stand- ing land-use conflicts between migratory yak herders and sedentary farmers, a community-based forest management initiative designated specific corridors for livestock grazing, which allowed for reforestation efforts, improved water quality, and reduced environmental degradation, stabilizing the ecosystem and enhancing the livelihoods of both communities involved. In Chaling Community Forest in Trashigang District, which faced rapidly depleting forests and scarce drinking water, local communities collaborated to restore degraded lands and manage water resources, improving forest cover, reducing soil erosion, and enhancing access to clean drinking water. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 70 3 . Facilitating the transition toward a greener and more diverse economy that aligns with sustainable forest management principles. Establishing microfinance institutions that specifically target forest-based SMEs can facilitate entrepreneurs’ access to capital and provide low-interest loans and grants to support sustainable practices in forestry. Innovative financing mechanisms, such as guarantees or PPPs, can lower investment risks and enhance access to capital. Extending investment incentives such as tax breaks or subsi- dies for investors in forest-based industries can also encourage private sector involvement and innovation, while providing technical support for adopting efficient harvesting techniques and sustainable and efficient processing methods can help modernize production techniques and investment in modern technology for timber and NTFP production. Finally, collaborating with research institutions and forging partnerships between government agen- cies, nongovernmental organizations (NGOs), and private companies can develop new technologies that enhance productivity, significantly benefiting SMEs. Training, targeted capacity-building initiatives, and other support can help reduce barriers to entry for commu- nity forestry management groups and entrepreneurs, including youth. This includes training on sustainable forest management, marketing strategies, product design, and business management skills, and streamlining regulations for starting and operating forest-based businesses to clarify land use rights and simplify the application process for permits related to forest resources. Facilitation, capacity-building, technology transfer, access to finance and mechanisms for equitable benefit-sharing among community members can also strengthen community forestry initiatives by incentivizing local communities to manage forest resources sustainably and generate income through ecotourism, NTFPs, and timber sales. Strengthening forest governance and law enforcement can complement economic measures. This requires a multifaceted approach that addresses policy frameworks, community engagement, technological integration, and law enforcement mechanisms to create a robust framework for sustainable forest management while address- ing illegal logging, climate change impacts, and community engagement in governance processes. Revising laws, such as the Forest and Nature Conservation Act (1995), to address gaps in enforcement and incorporate stricter penalties for illegal logging and poaching can strengthen forest governance, while enhancing collaboration with the Indian authorities is vital to address cross border illegal logging and timber smuggling, especially in southern regions. Implementing and actively enforcing management plans that detail sustainable practices, pest manage- ment, fire control, and disaster preparedness is also crucial for effective governance. Forest management must emphasize the reduction of the likelihood and extent of damage from forest fires. Bhutan should develop EWS and link these to climatological data, weather forecasting, and integrated monitoring systems of the forest and surrounding areas. Leveraging technology for forest monitoring—especially advanced monitoring technologies such as geographic information systems, remote sensing, and drones—can enhance the government’s ability to track and analyze deforestation and illegal logging. Addressing personnel shortages in the Department of Forests and Park Services (DoFPS) can help enforce existing laws effectively across rural and urban areas. 3.4. Creating jobs in a green and diversified economy Bhutan’s commitment to sustainable development, enshrined in its GNH philosophy, presents a unique oppor- tunity to create more and better green jobs by investing in hydropower and renewables, CSA, resilient cities and infrastructure, ecotourism, and sustainable forestry. With hydropower as the backbone of its economy and a growing emphasis on energy diversification, expanding solar and other renewable energy sources alongside climate-resilient hydropower operations can generate employment in engineering, operations, grid maintenance, and environmental management. Sustainable and climate-resilient hydropower development will provide direct employment opportunities, particularly in high-skilled labor positions. The ambitious pipeline of hydropower B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 71 3 . Facilitating the transition toward a greener and more diverse economy development projects will provide jobs directly and indirectly, during the design, construction, and O&M phases, and in domestic supply chains that provide key parts to civil and electromechanical works related to these assets. Expanding hydropower capacity and adapting the country’s hydropower infrastructure can provide jobs for unemployed workers. In 2022, approximately 4,000 workers (about 1 percent of all employed individuals) worked directly in the hydropower sector, excluding construction. Of these, around 26 percent held a higher education degree, mostly in engineering (14.6 percent) and business administration (31.6 percent). The hydropower sector in Bhutan mainly hires technicians (31.6 percent), followed by service workers (15.4 percent), and sector profes- sionals (14.4 percent). There is a significant pool of unemployed workers with relevant qualifications in immediately relevant fields who could fill the demand for skilled labor in the sector, particularly as Bhutan engages in an ambi- tious and resilient hydropower expansion vision under new modalities such as PPPs and joint ventures. Targeted training programs for these high-skilled unemployed workers could enhance the sector’s workforce, reduce unem- ployment, and support growth. The ecosystem around hydropower expansion could also prove to be particularly employment-rich and position Bhutan as a leader in subsectors where it already holds a comparative advantage, such as environmental science and analytical services, sustainable real estate, and tourism. There are also opportunities to create jobs in nonhydro sectors. CSA can enhance food security, strengthen organic farming practices, and promote agroforestry, creating opportunities in sustainable land management, agricultural extension, and waste-to-energy solutions. Urbanization and infrastructure development must balance growth with climate resilience and energy efficiency, creating jobs in green construction, energy-efficient building design, and sustainable urban planning. The country’s high-value, low-impact tourism policy also positions ecotourism and cultural heritage conservation as critical drivers of employment, fostering careers in nature guiding, conservation, and sustainable tourism management, while the country’s vast forest resources and commitment to carbon neutral- ity create demand for professionals in forest conservation, community forestry, and carbon credit management. Table 11 outlines emerging green job opportunities across these vital economic sectors, with indicative examples. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 72 3 . Facilitating the transition toward a greener and more diverse economy Table 11. Emerging green jobs in the key economic sectors Sector Job opportunities Key responsibilities Hydropower and Hydropower engineer Design, develop, and maintain hydroelectric power plants renewables Collaborate with local authorities to ensure minimal environmental impact Plant operator Oversee daily hydropower plant operations Monitor and adjust system performance as needed Maintenance technician Maintain and repair plant equipment, commercial and heavy-duty vehicles Adapt to climate-related operational challenges Hydrologist and environmental Monitor water flows and manage river systems engineer Ensure sustainable hydropower operations Electrical engineers and Manage electricity transmission and distribution technician Optimize grid efficiency and reliability Transmission line worker Install, maintain, and repair power lines Ensure grid stability for energy exports Renewable energy technician Install, inspect, and maintain solar panels and/or wind turbines Troubleshoot and repair system malfunctions Climate risk analyst Assess risks posed by climate change to hydropower and other sectors Develop adaptation strategies for extreme weather events Energy policy analyst Develop and analyze policies to promote sustainable energy Advise government agencies on regulatory frameworks Community-based microgrid Plan, design, and implement microgrids in rural areas developer Engage with communities to ensure acceptance and sustainability CSA Organic farming specialist Implement and promote organic farming techniques Support farmers with pest and nutrient management Precision agriculture technician Use sensors, drones, and AI for efficient farming Agroforestry consultant Integrate trees/shrubs into farmland for better yields and biodiversity Advise on sustainable land use practices Agricultural waste manage- Develop waste-to-energy solutions (e.g., biogas) ment specialist Implement composting and resource recovery systems Cities and Green building architect Design energy-efficient, ecofriendly buildings infrastructure Ensure compliance with Bhutan’s green building guidelines Sustainable materials engineer Research and develop ecofriendly construction materials Evaluate lifecycle impacts of various building materials B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 73 3 . Facilitating the transition toward a greener and more diverse economy Sector Job opportunities Key responsibilities Energy efficiency consultant Assess and reduce energy consumption in buildings Recommend improvements to heating, ventilation, and air conditioning, lighting, and insulation Urban planner (for sustainable Plan infrastructure with minimal environmental impact development) Develop land-use strategies aligned with Bhutan’s GNH principles Tourism Ecotourism guide Lead tours focused on Bhutan’s natural and cultural heritage Educate visitors on conservation practices Sustainable tourism manager Develop ecofriendly tourism initiatives Ensure tourism benefits local communities and ecology Wildlife conservationist Protect and manage wildlife habitats Conduct biodiversity surveys and community awareness programs Cultural heritage Preserve and manage cultural sites sustainably conservationist Coordinate with local stakeholders for heritage tourism Adventure tourism operator Develop adventure tourism opportunities Coordinate tourism around adventure sports sites Forestry Forest conservation officer Manage and protect forest resources Enforce conservation laws and conduct reforestation programs Community forestry Develop and manage community forest initiatives coordinator Collaborate with local communities for sustainable forest use Forest carbon specialist Design carbon sequestration projects Participate in carbon offset and trading programs B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 74 4. SECURING FUNDING FOR CLIMATE CHANGE MITIGATION AND ADAPTATION B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 75 4 . Securing funding for climate change mitigation and adaptation 4.1. A nascent financial sector Climate change carries multifaceted implications for Bhutan’s financial sector. As a high-altitude landlocked country, Bhutan is already experiencing the effects of a changing climate. These physical hazards and related climate events could translate into financial risks, and a growing number of central banks and regulators have issued warnings on the impact of climate risks on the stability of financial systems. The sector is exposed to two key types of climate risk. Climate physical risks stem from the gradual and abrupt impacts of climate change on the value of real assets or financial instruments. Climate transition risks originate from efforts to further decarbonize the economy, which may create economic adjustment costs across sectors, and in turn, financial risks for firms and investors that did not anticipate the transition, jeopardizing the stability of the financial system. Strengthening the financial sector is a prerequisite for both economic diversification and unlocking new sources of climate finance. A largely cash-based economy with limited financial infrastructure and formal financial services, Bhutan’s financial sector is underdeveloped. The lack of sophistication in loan markets due to the lack of risk- based lending, and the reliance on cash, create several challenges to expanding access to financial resources. Mobilizing different sources of climate finance typically rely on existing financial systems, and inclusion is essen- tial to ensure that the benefits of investments in climate resilience reach everyone. State presence in the financial sector is prominent, and access to credit is low. Bhutan has four commercial banks in addition to the Bhutan Development Bank (BDB), which finances rural development. The sector is domi- nated by state-owned financial institutions, and in 2020, the three state-owned banks accounted for 60 percent of assets in the banking system and 51 percent of assets in nonbanking financial institutions, including the NPPF. This public sector dominance implies that financial risks can translate into fiscal risks. Due to the country’s rugged terrain and sparse population distribution, banking growth is largely concentrated around Thimphu and has limited reach in rural areas. Though over 76 percent of Bhutanese have a savings account, only 21.8 percent have access to loans (RMA 2020). Limited access to finance is a key challenge for sectors and firms. Credit flow is concentrated in a few sectors, reflecting the lack of private sector diversification, and is declining for production and manufacturing activities (Figure 34a). In terms of credit outstanding, the housing sector, along with services and tourism, accounted for around 50 percent of total credit in 2022. The share of trade and commerce, as well as production and manufacturing, in total credit has declined by more than five percentage points of GDP between 2014 and 2022. Banks have the highest exposure in the housing sector, while nonbanks have the highest exposure in services and tourism. The credit share of SMEs declined significantly in recent years, while the share of non-enterprises—including housing, transport, personal, employee loans, and education loans—increased to nearly 60 percent of total credit in 2022 (Figure 34b). Cottage firms, which account for more than 96 percent of all firms, receive less than 10 percent of total credit. A lack of risk-based lending and weak capital markets further constrain financing sources for the private sector. The sector remains dominated by basic credit products with fixed interest and terms, although some credit products with floating interest rates have been offered since 2016. This is partly because banks still assess loan requests against collateral, rather than risk-based pricing, which links the borrower’s credit score to the loan interest rate. This reliance on collateral has led borrowers to seek alternative sources of financing from nonbank lenders, which have weaker supervision and a lower ability to absorb losses. Capital markets are shallow, with a small number of listed companies and limited development of supporting regulation. Insurance and pension funds compete with banks to lend to individuals and firms. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 76 4 . Securing funding for climate change mitigation and adaptation Figure 34. Distribution of credit, percent, 2017–22 a) By sector b) By firm size 35 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 ce e ism ns rs cro ge all m rge e ing t f nu or ris ur he diu er oa tta Sm p us La Mi ult a ur erp mm ns Ot /M lL Co Me Ho To ric Tra t na en s/ od o Ag /C r so ce n- Pr de No r vi Pe 2017 2019 2022 Tra Se Source: World Bank staff calculations, based on Royal Monetary Authority (RMA) data. Notes: In panel a, ‘Others’ includes education loans. In panel b, ‘Non-enterprise’ includes housing, transport, personal, staff, and education loans; cottage firms have less than 5 employees, small firms, 5–19, medium firms, 20–99, and large firms 100 or more. The RMA’s Green Finance Roadmap, developed in 2020, aims to achieve environmental and financial security and includes plans for establishing monitoring, supervision, and assessment structures for the financial sector, and establishing a green exchange. The roadmap covers many key elements that are instrumental in building an effective approach for greening the financial system—such as governance and coordination, risk management and green finance flows—and includes high-level policy actions, with a timeframe for implementation. There is scope for further comprehensive reform beyond the banking sector, incorporating nonbanks, insurance companies, the capital market, and institutional investors. Bhutan has taken impressive steps to develop a national green taxonomy. A taxonomy can support financial actors in making informed decisions on environmentally friendly investments, scaling up finance for climate mitigation, adaptation and other environmental goals. It can also facilitate reliable and comparable disclosures relating to sustainability risks and opportunities and provides a consistent starting point for standard setters and product developers. A taxonomy complements actions to align environmental regulations and fiscal policy to support the greening of the real sectors and can further promote market integrity by reducing “greenwash- ing”. A national green taxonomy demonstrates many good practices, including a clear formulation of its purpose, environmental objectives, conceptual framework and target users, and incorporating some key principles such as the do-no-harm clause. Going forward, it will be an important tool for further mainstreaming green consider- ations in the financial sector. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 77 4 . Securing funding for climate change mitigation and adaptation 4.2. Climate finance challenges Bhutan has high climate finance needs. Its second NDC (RGoB 2021) estimates investment needs of Table 12. Bhutan’s financing needs, as estimated $7.7 billion up to 2030, excluding waste management, in various national plans energy efficiency, and the hydrogen roadmap, to cover Long-term plans and finance needed $, millions substantial investment in the infrastructure needed to ensure total emissions do not exceed the seques- 13th Five-Year Plan 5,979.0 tration potential of its forests. Its NAP estimates total resource requirements at nearly $14 billion, excluding Water 204.9 hydrological services for water resource management, protecting critical infrastructures and settlements, and enhanced early warning and response capacity. Agriculture and livestock 95.2 About $12.9 billion of this is for climate-resilient road infrastructure. Data extrapolated from global reports Forest and biodiversity 48.5 suggest that climate finance needs for energy and transport resilience, irrigation, river protection, and Human settlements 13,088.9 water, sanitation, and hygiene over 2024–30 range from $0.5–1.3 billion. There is no common definition Health 19.7 of climate finance, and as a result, estimates vary widely, due to methodological differences and data Energy 486.1 availability, but all reports agree that total financing needs as a share of GDP are much higher than in Climate services and disaster risk reduction 1.3 developed economies.52 Bhutan’s financing needs as summarized in various national plans illustrate the Industries 3.2 diversity in estimates, depending on time period and activities covered (Table 12). But financing needs are Surface transport 3,222.0 consistently substantially higher than the flows, indi- cating an urgent need for financial solutions. Waste management NA Bhutan has accessed resources, especially grants, LTS financing needs by 2025 1,145.6 from all dedicated sources of climate finance (Figure 35). Climate finance flows for the country over 2013– LTS financing needs by 2030 2,105.6 18 are estimated at about $0.5 billion (UNESCAP), with the public sector and development finance insti- LTS financing needs by 2050 3,233.7 tutions accounting for most of these flows. Bhutan has Source: RGoB 2025. accessed the Green Climate Fund (GCF) indirectly, via a $26.6 million grant for the Bhutan for Life initiative through the World Wide Fund for Nature in 2017, and $25.3 million in grant financing through UNDP in 2019. The Bhutan Trust Fund for Environmental Conservation (BTFEC) is an accredited entity for direct GCF access but has yet to access funds through this window. The country has also received readiness grants from the GCF, about $3 million in funding from the Climate Investment Funds under the Pilot Program for Climate Resilience, and accessed grants from the Adaptation Fund through the BTFEC and the UN World Food Program.53 52 Global climate finance methodologies also acknowledge limitations associated with estimating the cost of inaction, capital losses caused by stranded assets, losses to nature and biodiversity, or those from increased conflict and migration (CPI 2023). It is also important to consider climate goals in conjunction with development goals when estimating financing needs for developing countries. 53 https://www.cif.org/country/bhutan;https://www.adaptation-fund.org/project/adaptation-to-climate-induced-water-stresses-through-integrated-landscape-man- agement-in-bhutan/;https://www.adaptation-fund.org/project/innovative-adaptation-financing-to-build-the-resilience-and-adaptive-capacity-of-smallholder-farm- ers-in-bhutan-inaf-bhutan/. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 78 4 . Securing funding for climate change mitigation and adaptation Figure 35. Sources of climate finance International Public Climate Finance Public & Private Sector Climate Finance Deployed through international system: multilateral, Deployed directly by private and public sector entities bilateral and MDBs A. Dedicated Climate B. Development Finance C. Private Finance D. Public Finance Finance Activity-based finance Investments in climate projects Domestic government spending ▪ UNFCCC Financial ▪ Financing from MDBs seeking commercial returns and resource mobilization Mechanisms (DRM) on climate-related activities ▪ Financial Markets (ESG ▪ Public budgeting Capital Markets, Commercial ▪ State-owned enterprises ▪ Other dedicated Financial Institutions) ▪ State-owned Financial CF funds ▪ Asset managers and asset Institutions owners ▪ National DFis ▪ Bilateral Development ▪ Corporations Finance Outcome-based finance E. Results-based climate finance F. Voluntary Carbon Markets G. Compliance Carbon Markets Source: World Bank. 4.3. Meeting the country’s climate financing needs To bridge the financing gap, Bhutan needs to ensure efficient domestic resource mobilization and further develop the financial sector. While it has made efforts to liberalize foreign direct investment regulations, in the near term, domestic finance will likely account for most financial flows for climate and development priorities. Strengthening domestic finances, increasing the efficacy of revenue mobilization, and improving the efficiency of public spend- ing will be key to ensure adequate balancing of investments with expenditures and efficient resource allocation to key priorities while exploring potential for leveraging other sources. But limited financial sector development constrains Bhutan’s ability to access pools of capital or develop innovative financial products. As such, it urgently needs to strengthen financial sector development by increasing risk-based lending, developing capital markets to unlock institutional investments, and strengthening financial sector supervision to pre-empt potential climate risks to the sector. Considering their scarcity, Bhutan should also prioritize the efficient use of concessional resources, strategi- cally deploying them to activities with the greatest impact, based on several factors. It is important to strategi- cally consider the role of scarce concessional resources and channel them toward the most urgent priorities that are unlikely to be financed by other sources, such as conservation and resilience efforts. The Ministry of Foreign Affairs and External Trade (MoFAT) already performs some of these functions, but making a specific link to climate by formulating and implementing a strategic approach for directing climate and development finance toward iden- tified priorities can help avoid fragmentation of the aid architecture and ensure alignment of various initiatives with national priorities. Centrality to climate and development goals, ability to attract other sources of finance, potential for developing commercially viable business models, and potential for leveraging other resources can all determine the targeting of scarce resources. Providing flexible capital and favorable terms, new blended finance instruments tailored to the local context could leverage public and concessional finance to mobilize private capi- tal for green investments. These can mitigate risks and rebalance the risk-reward profiles of impact investments, making them commercially viable over time. The following sections outline recommendations for each sector, based on the analysis conducted in other sections of the CCDR. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 79 4 . Securing funding for climate change mitigation and adaptation Resilient hydropower and carbon markets Bhutan needs over $40 billion to implement its hydropower development pipeline to meet its ambitious goals of adding more than 20 GW of installed hydropower capacity by 2040.54 Assuming a debt-to-equity ratio of 70:30, this implies raising over $28 billion in debt and more than $12 billion in equity, providing Bhutan with an oppor- tunity to design innovative financing schemes that rely on win-win partnerships while preserving macroeconomic and financial soundness. To date, the country’s hydropower development model has relied on intergovernmental collaboration with India and joint ventures between Indian and Bhutanese public sector companies. Bhutan is now exploring alternative development models. Bhutan has experience with using PPPs to develop hydropower and can continue to explore them to structure large projects. Partnering with private entities would allow it to leverage private expertise and financing, increasing access to capital, reducing exposure to over-borrowing and default risks, broadening access to technical expertise, and opening the door to new export markets and offtake opportunities. Druk Green Power Corporation (DGPC)— the state-owned enterprise (SOE) in charge of developing and operating hydropower plants—has already engaged in PPPs with Indian partners to structure large hydropower projects, such as the 126 MW Dagachhu plant, and support pipeline projects, such as the 600 MW Khorlochhu plant. Bhutan can continue to explore this approach, including with other potential export markets such as Bangladesh or Sri Lanka. Taking a comprehensive portfolio approach could allow DGPC and RGoB to benefit from sustainable financing. DGPC’s strong balance sheet ($764 million equivalent and paid-in capital of $392 million), significant equity value through consistent revenue generation and gradual debt amortization, and healthy debt-to-equity and interest coverage ratios provide a strong foundation for a leverage-based fundraising strategy. Supporting this through a refinancing scheme would allow DGPC to efficiently recycle capital from performing assets and redirect it toward new projects while maintaining a strong balance sheet position. Although DGPC has a robust track record in operational and financial performance, it would benefit from capac- ity reinforcement to match its portfolio expansion. This includes increasing manpower and training, particularly in environmental and social standards, DRM, procurement, and financial management. As Bhutan’s large hydropower projects have the potential to generate strong export revenue, DGPC can take advantage of the predictability of its projects’ cash flows to access financing based on the securitization of these future receivables. A range of public and private financial instruments are designed to capitalize on a proj- ect’s robust financial viability by structuring a form of collateralization or guarantee based on export revenues. For countries like Bhutan, classified as an International Development Association (IDA) country, the World Bank offers International Bank for Reconstruction and Development “enclave loans” to access financing without impacting its IDA borrowing limit. Ambitious hydropower expansion plans imply that Bhutan will need to tailor its risk management approach to the magnitude and diversity of risks that will emerge from these large projects. As the country engages with new financiers and electricity trading partners, its currency of operations may go beyond the Bhutanese ngultrum or Indian rupee, exposing it to potential foreign exchange losses. Designing a tailored currency hedging strategy will ensure the highest possible level of matching between hydropower trade earnings and financial obligations. Other credit enhancement products, such as insurance and guarantee schemes, may help cover a variety of risks to large-scale projects, including natural disasters and political risks, increasing the attractiveness of these proj- ects to private investors. As credit enhancement products can be costly, Bhutan can seek advisory services on the availability of such products from development partners. 54 Assuming an average cost of $2 million/MW developed and a pipeline of an additional 20,884 MW to be developed through small, medium, large, and mega hydropower projects by 2024. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 80 4 . Securing funding for climate change mitigation and adaptation Box 6. The Amazon Reforestation-Linked Outcome Bond In August 2024, the World Bank issued the $225 million, nine-year principal protected Amazon Reforestation-Linked Outcome Bond. Its unique feature is that the return is linked to the issuance and monetization of carbon removal units, which allow about $36 million of the capital mobilized through the bond to be channeled to support refor- estation projects through the Hongkong and Shanghai Banking Corporation (HSBC) to the carbon removal startup, Mombak. An underlying emissions reduction purchase agreement between Microsoft and Mombak guaranteed the future off-take of carbon removal units. Bond investors enabled carbon payments to be made available upfront by foregoing ordinary coupon payments and instead receiving amounts linked to the value of the carbon removal units generated and sold by the reforestation projects. To capitalize on the low GHG emissions of hydropower projects, Bhutan can explore all potential climate finance instruments and prioritize those at the lowest financial and transactional cost. Bhutan can use mitigation outcomes to generate additional revenue streams, issuing emissions reduction certificates and related carbon credits to increase the economic and financial viability of projects and strengthen their attractiveness to financiers. A recent example can be illustrative in this regard (Box 6). Bhutan is well-positioned to take advantage of new opportunities in global carbon markets. Although these markets are still relatively small—valued at approximately $1.4 billion in 2024 (Turner et al. 2025)—and markets under the Paris Agreement are only beginning to see the first few deliveries of internationally transferred mitigation outcomes, estimates suggest that they markets could grow to as much as $250 billion per annum by 2030 (IETA 2021). After signing a memorandum of understanding in 2024, Bhutan and Singapore have concluded negotiations on an imple- mentation agreement that would ensure carbon asset development with environmental integrity and quality. With an initial focus on forestry and hydropower, the initiative aims to secure commitments from potential buyers, prepare high-quality projects, build capacity among stakeholders across the value chain, and monetize them at a fair price and at scale. For the hydropower sector, this could present a valuable source of additional debt-neutral financial flows. Bhutan could deploy carbon revenues flexibly to address financing barriers. When dealing with carbon credits, it is important to consider both their environmental integrity (ensuring they are unique, real, additional, perma- nent, and measurable) and their social integrity, to ensure communities, especially Indigenous Peoples and local communities, benefit most from these programs. Through ongoing technical assistance for the Bhutan Climate Fund (BCF), the World Bank is working with RGoB on these issues and expects to support the development of a carbon market strategy. Market sounding to better understand buyer preferences and describe the quality of the credits will help overcome some of the current barriers to scaled-up participation in carbon markets. Early action on these areas will help Bhutan benefit from its unique positioning and leverage opportunities for engaging in markets. The structure of the BCF and the preparation of project pipelines to use carbon credits are crucial decisions. The establishment of the BCF has been formally approved and technical work on its mode of operation has been completed, but it is yet to be decided whether BCF will be an independent entity or part of another institution. Depending on this decision, Bhutan will need to develop a legal framework to grant the BCF the right to aggregate and sell credits on behalf of other entities, handle transactions, and receive payments. Developing SOPs would help strengthen the pipeline of projects, ensuring the BCF has the legal right to sell the credits, can start getting existing projects with generated credits through the approval process to obtain the necessary government support for sale, and allow it to conduct information sharing and capacity building for project developers and other local stakeholders to create an ongoing pipeline of carbon projects that will continue to generate credits. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 81 4 . Securing funding for climate change mitigation and adaptation Building on the World Bank’s Forest Carbon Partnership Facility’s support in exploring Bhutan’s potential for accessing carbon revenues, the country is assessing the possibility of digitizing its monitoring, reporting, and verification (MRV) system in the REDD+ sector. Combined with earth observation technologies, artificial intel- ligence (AI), and machine learning, a digitized MRV system can play a crucial role in quantifying, monitoring, and verifying emissions reductions or removals. Digital technologies can enhance the accuracy and robustness of carbon credit MRV, which can be combined with innovative financing instruments, such as carbon-linked bonds, to securitize carbon credit purchase contracts, leverage resources from bond investors to make carbon revenues available upfront to project entities, and address financing gaps in the project cycle.55 Climate-smart agriculture Improving smallholder farmers’ financial literacy can strengthen their understanding of—and increase their access to—loan and insurance products. Understanding the profitability of investing in CSA technologies and financial literacy training will help farmers, who are generally risk averse, to make informed decisions and increase their likelihood to invest in CSA and productivity improvements. Given the high climate vulnerability of agriculture, insurance can help stabilize incomes and livelihoods during crop failures, floods, or pest events, and increase the creditworthiness of loan applicants to support CSA investments, building on ongoing pilots by organizations such as UNDP . But ensuring affordability can be challenging, and catastrophic risks may require a combination of public subsidy support, aggregation, and innovative risk pooling to ensure adequate diversification over a wider geographic region. For example, ZEP-RE, a specialized Common Market for Eastern and Southern Africa institution, is a reinsurance agency that has developed integrated financial service packages for pastoralists across Kenya, Ethiopia, and Somalia for drought risk mitigation (Box 7). Strengthening the capacity of BDB, which holds over 90 percent of Bhutan’s agriculture loan portfolio, would allow it to play a leadership role in developing and deploying CSA financial products. Increasing the bank’s technical capacity to offer a wider range of products—including those that recognize and reward GHG emission reductions and make upfront capital available for risk mitigation—can incentivize the uptake of CSA interventions. Box 7. De-Risking, Inclusion, and Value Enhancement of Pastoral Economies (DRIVE) Project Climate change impacts have increased the intensity of dry and wet seasons in the arid regions of the Horn of Africa, resulting in extreme drought conditions that have devastated agricultural production, destroyed crops, and killed more than 3 million livestock. The World Bank’s DRIVE project aims to enhance pastoralists’ access to financial services for drought mitigation, include them in value chains, and facilitate livestock trade. The design of an integrated financial protection package, combined with capacity building for stakeholders through drought insurance awareness, enables pastoralists to invest in their herds, increasing quality over time. Such de-risking is also expected to support the mobilization of private capital. The program includes a sovereign climate insurance policy that enables the government to provide protection to the population. ZEP-RE manages the regional distribution of the financial package to pastoralists. The pooling of different countries into a regional insurance scheme creates scale, enables smaller countries to join, and mobi- lizes capital from local and international reinsurers to assume drought risk. 55 World Bank. 2024. “New Model for Conservation Finance to Accelerate Reforestation Efforts in the Amazon”. https://www.worldbank.org/en/news/ feature/2024/08/12/new-model-for-conservation-finance-to-accelerate-reforestation-efforts-in-the-amazon. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 82 4 . Securing funding for climate change mitigation and adaptation In the near term, providing guarantees for CSA investments could alleviate pressure on borrowers and mitigate risk for financial institutions, while in the long-term, mainstreaming CSA measures into credit assessments could support wider adoption of CSA practices. Given the prevalence of collateral-based lending, public guaran- tees could be offered at the national level for a range of CSA practices. Reviewing the National Credit Guarantee Scheme to identify opportunities to strengthen guarantees through better structuring while managing costs could enhance efficacy,56 and combining this with performance-based grants or subsidy programs could incentivize uptake and enable the establishment of a successful track record, addressing any differences in perceived and real risks. In the long term, mainstreaming CSA measures into credit assessments could reduce farmers’ reliance on concessional or subsidy resources for financing such activities. To increase resources to finance capital expenditures and working capital, matching grants (or cost-sharing mechanisms) for CSAIPs can be made conditional on adopting a green business idea. To invest in CSAIP support systems, districts will need to mainstream budgetary provision, and performance-based grants could incentivize local governments to invest in CSA packages. Resilient cities and infrastructure Effective tax collection and improved revenue management systems would strengthen local revenue generation, creating sustainable revenue streams for cities to finance climate action. Green taxes on vehicles and fuel are not collected at the local level; rather, they are levied upstream by the Department of Revenue and Customs. A lack of incentives to strengthen collection, restricted revenue authority, and limited capacity to assess and admin- ister local taxes has resulted in weak general revenue mobilization in thromdes. Improving own-source revenue generation at local levels would reduce reliance on government grants, and capacity building in local institutions can improve the efficiency of budgeting and resource allocation. Given their limited revenue collection capabilities, cities will remain reliant on intergovernmental fiscal transfers in the medium-term (World Bank 2019c). The 2023 assessment of Bhutan’s climate-responsive public financial management (PFM) finds that the country has a climate-responsive fiscal decentralization framework and rates its performance as satisfactory (World Bank 2023a). The 13th FYP maintains a robust policy on vertical fiscal balance and equalization, allocating an indicative $861 million to municipalities over five years on centrally coordinated project-tied works as well as annual grants. Project-tied works support the development of a “common minimum infrastructure”. The distribution of annual grants is based on a resource allocation formula, built on specific crite- ria, including climate vulnerability, population size, region, poverty, and unemployment levels. Cities have some discretionary spending power to plan development activities and finance climate change activities. Grants for recov- ery and reconstruction of public infrastructure damaged by disasters are also prioritized (World Bank 2023b).57 The government can improve the climate responsiveness of PFM arrangements to ensure efficient resource allo- cation, including at local levels. Annual reporting on the use of climate change funds would strengthen the climate responsiveness of the fiscal transfer system. Local governments do not track climate-related expenditures in a structured manner, and climate-related spending is not systematically disclosed in financial statements. Subnational financial reporting is limited, reflecting challenges in accounting, reporting, and auditing (World Bank 2023b). Local governments do not have a climate change-related investment framework that clearly spells out universal mitigation and adaptation requirements for investment programs (World Bank 2023a). Introducing these processes could make local spending more effective, enhance transparency, and ensure greater alignment with climate action objectives. Digitizing public services and safety net mechanisms will enhance financing for resilience. The ability to pay for services and receive cash via mobile phones enables service delivery stability, access to funds, efficient resource allocation, and improved data and monitoring. These systems rely on mutually enforcing “digital stacks”, including 56 Anecdotal evidence suggests the duration of guarantee coverage was too short relative to the risk profile, considering repayments may occur later in the loan cycle. 57 64 Last revised in 2022, the Annual Grant Guidelines give local governments discretion to plan development activities. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 83 4 . Securing funding for climate change mitigation and adaptation digital identification (ID), payment solutions, and data exchange. Bhutan rolled out its national digital ID in 2023 and domestic payment systems using QR codes are robust, but systems and data remain fragmented across government departments. Adopting the national digital ID across digital services and making data interoperable would facilitate full end-to-end digitization for public service delivery and emergency cash transfers. Improving cost recovery could provide funding for climate-smart municipal services and disincentivize resource consumption. For example, across Bhutan, water costs are only partially recovered. Thromdes have established low water tariff structures for residential and commercial buildings, but tariffs in smaller municipalities are not regu- lated adequately, and some towns, such as Lhutense and Punakha, charge flat rates irrespective of consumption. Restructuring water tariffs to realistically reflect the cost-of-service provision and revising them periodically to keep pace with inflation while considering equity and consumers’ ability to pay can strengthen cost recovery. Addressing illegal connections and pipe leakages in thromdes and dzongkhags can help recover substantial revenue losses. This, in turn, would improve O&M and capital investment, reducing reliance on the national government’s capital subsidy (MoIT 2023). Municipalities may reconsider the structure of user charges for different services, which can improve the quality and reliability of services. Graded user fee systems, with different rates for businesses and households, or based on level of consumption, can help balance affordability considerations with shoring up the revenue base for urban local bodies. Improving transparency in the property market would facilitate the insurance of urban assets against natural disasters, transferring financial risks. The Property Tax Act of Bhutan 2022 aims to tax properties based on the value of land and properties, as determined by Property Assessment and Valuation Agency rates. This initiative can usher in transparency in property valuation and taxation. Financial institution valuations are often based on poor data and the standards and methods used vary. Only 18 percent of households have insured their assets (World Bank 2024c). Establishing a publicly accessible registry for land leases and transactions would improve data accuracy and reliability in market value assessments, and therefore prospects for financial risk transfer. Disaster risks Layering risk can enhance financial resilience and crisis preparedness. Bhutan undertook a series of measures during the COVID-19 pandemic—such as the Druk Gyalpo’s Relief Kidu and National Resilience Fund—to offer relief to its citizens. Unlike a pandemic, climate impacts can unfold over a longer period, and the scale of resources required could vary substantially. Financing for disaster risk and resilience should therefore categorize risks based on their frequency and severity to identify the most cost-effective strategies for combining climate and disaster risk finance and insurance products, enhancing financial resilience and crisis preparedness, and establishing long-term emergency response measures. For example, individuals or organizations can set aside funds or main- tain access to loans for potential losses to cope with lower-frequency, lower-severity events, relying on relatively cheaper resources for the lowest layers of risk. But they may wish to transfer the risks of high-severity, high-fre- quency events through products such as insurance. This would require increased efforts to ensure financial inclu- sion and the creation of national-level contingency funds to ensure access to emergency resources. Regional risk pools for disaster risk financing can reduce the financial burden on individual nations and promote resilience across the region. The toolkit of disaster risk finance instruments available globally has grown substan- tially in recent years, and the government can use a combination of instruments to ensure comprehensive cover- age. Financing disaster risk insurance products is particularly challenging, since the populations most severely affected are those that cannot afford insurance. Ensuring that risks can be adequately diversified in the provision of such insurance is also important for affordability. Diversifying through regional risk pools can provide parametric insurance that offers immediate liquidity after a disaster. Global examples demonstrate the value of diversifying risks across different geographies to reduce the likelihood of climate disasters occurring simultaneously. For exam- ple, the Caribbean Catastrophe Risk Insurance Facility was established to provide rapid liquidity to governments in the region following natural disasters and the Southeast Asia Disaster Risk Insurance Facility was established as a regional platform for financial resilience against climate shocks and disasters. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 84 4 . Securing funding for climate change mitigation and adaptation 4.4. Building a stronger financial sector Developing capacity and systems Ensuring financial inclusion is a key priority for the government, particularly in rural areas. Supplementing this with measures to build financial literacy can help ensure users of such services can make informed decisions, along the lines of the National Financial Literacy Strategy of 2018–23. Digital infrastructure could help enhance financial inclusion by reducing reliance on cash or the need for physical payment systems. This could link with ongoing national digitization efforts. Technical support to establish credit information bureaus that build on national digitization efforts could help the country move toward risk-based lending practices. Building bank and financial institution capacity to conduct credit assessments based on borrower viability would reduce their reliance on collateral arrangements, while increased credit availability can support private sector growth, particularly for MSMEs. Bhutan has taken steps to incorporate climate risk in the financial sector but could benefit from further work to assess the sector’s vulnerabilities. The RMA has introduced a series of measures to address risks to the finan- cial system and has spearheaded the development of the Green Finance Roadmap to integrate sustainability into the financial sector by creating tools and criteria for green financing, identifying stakeholders, and establishing monitoring frameworks to support inclusive green finance efforts. Further technical work to assess the financial system’s vulnerabilities to climate risks would also be beneficial, considering the high level of concentration of credit in a few sectors. Building a framework for issuing green or thematic bonds could pave the way to developing a green bond market and eventually issuing green sovereign bonds. Regulators and policy makers have several tools at their disposal to promote the development of green bond markets and stimulate domestic bond issuance, some of which are already covered in the Green Finance Roadmap. Adopting or developing green bond guidelines and standards that are aligned with internationally recognized frameworks, such as the International Capital Market Associa- tion’s Green Bond Principles, would ensure comparability on an international level (Box 8). Bhutan is also working on developing a sustainability bond framework and is developing an environment, social, and governance report- ing standard for listed companies, which can enable access to international bond markets and target investors focused on green opportunities. Establishing a comprehensive coordination mechanism would support the implementation of the Green Finance Roadmap. To promote a more coordinated approach and build a strong and efficient domestic green finance market, this mechanism should involve all financial sector authorities, relevant government stakeholders, and private sector actors. Establishing the National Sustainable Finance Committee—which includes the RMA, relevant MoF departments, the National Environment Commission (NEC), the Royal Securities Exchange of Bhutan, and Bhutan Chamber for Commerce and Industries—is a positive step in this direction. This committee aims to work closely with international partners and networks in the sustainable finance field. As a next step, it may consider develop- ing a detailed work plan with specific deliverables. It is also important to establish functional coordination mech- anisms between line ministries and subnational governments involved with climate-related investments. Training and capacity-building opportunities are available for the public and private sectors from various sources, includ- ing central banks and the Network for Greening the Financial System, which supports central banks, prudential supervisors, and policy makers to take steps to green the financial sector. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 85 4 . Securing funding for climate change mitigation and adaptation Box 8. Green bond issuance in Bhutan RGoB is planning to issue its first green bond on the international market. Developing and issuing green bonds can serve as a tool to channel resources to green initiatives that promote sustainable growth and meet the coun- try’s environmental, climate, and sustainability targets. Ahead of issuing the bond, RGoB is working with interna- tional credit rating agencies to obtain its first sovereign credit rating. The Sustainable Financing Framework, due for publication in 2025, will guide the issuance of thematic bonds. Laying the foundation for issuing green, social, and sustainability bonds, the framework was developed in line with the International Capital Market Association and European Union sustainable financing frameworks, which are recognized as best practices, with adjustments to align with the Bhutanese context. RGoB is committed to ensuring that its thematic bonds are of high quality and prevent greenwashing by following the strict Green Finance Taxonomy outlined in the framework. The Green Finance Taxonomy is a mechanism for identifying and recognizing products, projects, and initiatives related to sustainability from the perspective of mitigation and adaptation. It functions as a classification system on which economic activities are classified as ‘green’ if they contribute to environmental sustainability objectives. The strategic objective for developing the taxonomy was to provide sound and nationally accepted criteria for “green investments” to be used in frameworks and regulations for steering both national and international investments. The RMA is responsible for facilitating its implementation. As part of the initial implementation phase, every bank in Bhutan has set up a green finance department under the guidance of RMA. Building market readiness and investor confidence is key to ensuring the success of the green bonds, which require a dedicated pool of investors interested in financing environmentally sustainable projects. Investor confidence in the market ensures they feel secure about returns and the environmental impact of their invest- ments. Bhutan’s commitment to being carbon-negative and its strong environmental and conservation reputation can serve as a unique selling point for its green bonds. Highlighting these credentials by establishing a dedicated investor relationship unit can attract impact-driven investors who wish to support environmental and social causes. Developing robust monitoring, reporting, and impact measurement can help increase investor confidence. Investors need assurance that the funds raised are used appropriately for environmental projects. Bhutan can help build trust in the green bond market through clear and strict standards and MRV practices, as outlined in the Sustainable Financing Framework. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 86 4 . Securing funding for climate change mitigation and adaptation Strengthening public finances Global trends also show that the public sector continues to account for most of the climate finance, especially in developing countries. So, strengthening domestic resource mobilization and improving spending efficiency are critical actions that can ensure adequate fiscal space for public investments. Increasing domestic resources to build resilience will also require more strategic use of domestic revenues, especially from hydropower. Currently, 54 percent of domestic revenues (40 percent of which comes from hydro- power) is consumed by public spending on wages, goods, and services, rather than financing investments58 (World Bank 2024a). With capital spending largely supported by external grants and the anticipated decline in official development assistance, Bhutan will need to reallocate domestic resources—including revenue generated from hydropower exports—toward investments that facilitate domestic capital formation. A new fiscal strategy outlin- ing a long-term vision and minimum share of reinvestment of hydro rents for building productive capacity in trad- able sectors could ensure that these revenues support economic diversification. At the same time, the Bhutan Economic Stabilization Fund (BESF), and the fiscal stabilization measures that regulate contributions to, and uses of, the BESF, could be operationalized to smoothen volatile hydro revenues and public spending in the face of negative shocks. Strengthening the role of domestic development finance institutions can ensure public investments are channeled in a strategic manner toward identified priorities. To ensure they play an important role in climate projects with long investment horizons, Bhutan may need to reform existing regulations. For example, reviewing the NPPF’s investment approach could help strengthen its financial sustainability and direct its investments in a manner that complements other institutions. The NPPF’s assets are currently invested in government bonds, lending to corporations, including Druk Holding and Investments (DHI) companies, and loans to NPPF members. Reviewing regulations for NPPF investments would allow it to play an important role in making long- term investments for climate projects that have longer investment horizons than those typically considered by financial institutions. Fully integrating cryptocurrency operations into the country’s macroeconomic framework will strengthen domes- tic revenue and economic management. Bhutan has ventured into cryptocurrency mining through Green Digital Limited and a joint venture with Bitdeer, a Singapore-based, Nasdaq-listed company. Starting in 2022, the DHI’s 420 MW facility began mining Bitcoin. In 2023, a joint venture was established to build a 600 MW data center for Bitcoin mining, leveraging Bhutan’s green hydropower.59 Bitcoin mining in Bhutan uses cheap, green hydropower, making it more sustainable than fossil fuel-powered operations elsewhere. Cryptocurrency investments could boost exports and revenue, but returns are uncertain due to Bitcoin’s high volatility. Lower-than-expected returns could hinder the ability to repay RMA loans undertaken to finance the operations. By accounting for all aspects of Bitcoin mining operations in the macroeconomic framework, Bhutan can better monitor and manage their impacts on revenues and external balances, while reducing the risk of economic instability. Understanding how crypto- currency influences tax revenues and public resources can help the government make informed decisions about public investments and revenue mobilization. 58 Hydro rents have been absorbed through an increase in private and public consumption. Hydropower export revenues are transferred from the hydro SOE DGPC to the central government as general government revenue in the form of Corporate Income Tax (CIT), royalties, dividends, and profit transfers. A small fraction is transferred into the BESF, and the majority is used as current expenditure of the general government. A portion of the rents accrue to DHI, which uses a part of it to cross subsidize and invest in other SOEs. Both private and public consumption correlate positively with power exports and private investment and imports demonstrate no correlation with power exports (World Bank 2024a). This indicates that hydro-related revenue did not result in significant increases in private investment or imports. 59 The first 100 MW site in Gedu became operational by the third quarter of 2023, and a 500 MW data center in Jigmeling is expected to be operational by mid-2025. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 87 4 . Securing funding for climate change mitigation and adaptation RGoB began tagging budget for climate change mitigation and adaptation60 in the FY22/23 budget, but the amount allocated has remained limited. Climate budget tagging was initially piloted in four ministries before increasing to seven, all with mandates that are closely related to climate change adaptation and mitigation, in FY24/25. The initial pilot used five relevance levels, from “full relevance” to “not relevant”,61 but in FY23/24 and FY24/25, expenditures were classified as adaptation, mitigation, enabling environment, and no relevance. Activi- ties under “enabling environment” enhance stakeholders’ abilities to deliver reports on adaptation and mitigation activities. Climate budget tagging efforts have increased, and 24.3 percent of total government expenditure was tagged in FY24/25, compared to 13.9 percent in FY22/23. But expenditure related to mitigation and adaptation remains below 10 percent (9.9 percent in FY24/25 and 7 percent in FY23/24). Directing green tax revenues to climate-related investments can help ensure sustainable funding for conserva- tion. Bhutan levies green taxes of 5–30 percent of the value of goods on imported internal combustion engines and hybrid vehicles, petrol, and diesel to internalize their pollution externality. In 2022, Bhutan increased its sustainable development fee for international tourists to $200 per night, but then offered a 50 percent discount to encourage tourism until December 2027. Like all taxes and fees, these are directed to the national exchequer into a consolidated account to finance government expenditures and development activities. Dedicating such resources toward climate mitigation and adaptation investments can ensure the long-term sustainability of fund- ing for critical conservation efforts. Corporate social responsibility (CSR) activities provide opportunities for partnership with the private sector for low-emission and climate-sensitive development. There is potential for enhancing the scope of CSR financing through linkages to tax reporting and directing it toward specific priorities through policy interventions or statutory requirements. 60 Climate budget tagging is the process of identifying climate-relevant expenditure in a government’s budget. It enables governments to track the amount spent on climate change mitigation and adaptation, increasing accountability and transparency of spending, and can form a basis to estimate the funding gap a government needs to fill to achieve its climate goals. The breadth and depth of coverage for climate budget tagging varies by country. Some countries have also adopted a subcategorization of climate-change related expenditures, based on relevance to adaptation and mitigation objectives. For example, Nepal marks expenditures as highly relevant, relevant, or neutral if more than 60%, 20–60%, or less than 20% is relevant to climate change, respectively. 61 Full relevance denoted activities entirely built on climate policy; high relevance, activities outside the domain of climate change adaptation and mitigation; medium relevance, half of the activities are outside of climate change adaptation and mitigation; low relevance, have some indirect relevance to climate change adaptation and mitigation; not relevant, not relevant to any climate change adaptation and mitigation. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 88 5. ENHANCING COORDINATION AT LOCAL, NATIONAL, AND REGIONAL LEVELS: A KEY TO EFFECTIVE CLIMATE CHANGE ACTION B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 89 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action 5.1. Mapping current institutional arrangements Bhutan has a comprehensive climate governance framework, but capacity constraints and limited budget allocations hinder its effective implementation. The involvement of multiple institutions at national and subna- tional levels further complicates coordination and implementation (Figure 36). At national level, the NEC serves as the apex body for overseeing environmental policies, including climate action, supported by the Department of Environment and Climate Change (DECC), which acts as the technical secretariat. Budget allocations to the NEC averaged 0.68 percent of the total budget between FY19/20 and FY21/22. The average budget execution rate for NEC during this period was 68 percent, compared to the average overall execution rate of 99.6 percent. Responsible for coordinating climate strategies, including the NAP , LTS, and NDCs, the DECC faces significant challenges, including limited technical expertise and high staff turnover and attrition, which weaken its ability to effectively coordinate across sectors and government levels. In 2025, it had 39 staff members, and 46 percent of these were administrative staff and assistants.62 Its Climate Change Division employs seven people. The 2023 NAP implementation report also notes that the Climate Change Coordination Committee—which has members from the civil service, private sector, and civil society, is mandated to advise the NEC on climate change, and monitors the implementation of the National Climate Change Policy and the NAP—would benefit from capacity building (DECC 2023a). Figure 36. Bhutan’s environment and climate change institutional framework Parliament Cabinet International Climate Change PMO OCASC Agreements/organizations C4CS Governance Social Economy Security NEC/NCCC MoENR DECC/NECS NCHM C4 CCD DMFDF MoF Authorities DPBF Dzongkhag Gewog MoHA GAO Central/Local MRG DEC Universities/Academia MoICE, MoIT, MoESD, MoH, MoAL, MoFAT CSO/CBO/Private Sector Source: World Bank (forthcoming), based on DECC 2023a, 2023b; UNDP 2024. Notes: C4 = Climate Change Coordination Committee; C4CS = Committee for Coordinating Secretaries; CBO = community-based organization; CCD = Climate Change Division; CSO = civil society organization; DEC = District Environment Committee; GAO= Gewog Administrative Officer; MoESD = Ministry of Education and Skills Development; MoH = Ministry of Health; MRG = Mainstreaming Reference Group; PMO = Prime Minister’s Office; OCASC = Office of Cabinet Affairs and Strategic Coordination. 62 http://www.nec.gov.bt/who-is-who. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 90 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action Several ministries also play a role in climate governance; while some have clear mandates, for others, over- lapping responsibilities can lead to inefficiencies in policy implementation. The MoAL oversees CSA practices, while the MoENR focuses on sustainable energy development, particularly hydropower. The MoF is responsible for mobilizing and managing climate finance, including Bhutan’s participation in international funding mecha- nisms, such as the GCF and the Global Environment Facility. But stakeholder responsibilities continue to overlap in terms of planning, mainstreaming, and prioritizing climate change action in strategies, programs, and plans, undertaking stakeholder consultations, and implementing climate action (NEC and UNDP 2022). This results in a duplication of effort which, combined with limited capacity, often leads to inefficient policy implementation. Ministries and agencies face staffing challenges at central and local levels. In 2023, just 46 civil servants (0.16 percent) were mapped to environmental services, compared to 71 (0.23 percent) in 2021. Combined with limited technical competencies (NEC and UNDP 2022), this poses challenges for Bhutan’s capacity to plan, design, and implement climate change action. Although the 2022 civil service reforms sought to enhance climate change coordination, additional reforms would be beneficial. Reforms aimed at streamlining mandates among key climate focal agencies—such as the NEC/National Climate Change Committee, DECC, and MoF—have led to much-needed improvements. The reforms also established C4CS, which is responsible for a well-coordinated civil service. The Cabinet Secretariat, compris- ing the PMO and OCASC, is responsible for human resource planning, planning and regulatory coordination, and macroeconomic policy. But additional reforms to clearly define the mandate and role of line ministries, clarify postreform roles of all stakeholders, and ensure the effectiveness of coordination forums such as the National Technical Working Group for NAP would help remove remaining uncertainty. Clarifying coordination mandates, processes, and mechanisms, particularly at technical, sectoral, and local levels, and reviving central and local MRGs is also advised.63 Dzongkhag and gewog administrations play a crucial role in translating national climate policies into on-the- ground action. Local governments are responsible for managing key climate-sensitive sectors such as water resources, agriculture, and disaster risk reduction, but capacity remains a significant barrier to effective climate action. Local governments often lack the technical expertise and resources needed to implement adaptation and mitigation projects, and coordination between national and local agencies is limited (NEC and UNDP 2022). Central and local MRGs, established to facilitate local-level climate integration, are currently inactive, further hindering local climate governance. There is significant scope to strengthen institutional and stakeholder coordination to expedite holistic climate change action. At the institutional level, Bhutan’s National Environment Strategy and Climate Change Policy both highlight stakeholder coordination as a crucial issue. Other critical strategies and plans, such as the LTS, NAP , and 13th FYP , recognize that enhanced stakeholder coordination is necessary to achieve established objectives and acknowledge that coordination is less effective when agencies duplicate efforts due to unclear roles and mandates. This lack of clarity hampers the prioritization and coordination of national climate change initiatives, but these have so far largely remained as intentions (NEC 2021). 63 The NEC and the former GNH Commission established central and local MRGs to integrate environment, climate, and poverty concerns into planning. These multisectoral groups—which include policy makers, finance experts, and CSOs—played a key role in mainstreaming crosscutting issues. By June 2016, local MRGs had been established in all 20 districts, but NAP consultations indicated they are no longer active and should be revived (UNCDF 2021). B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 91 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action 5.2. Existing laws and regulatory frameworks, sectoral policies Bhutan has a comprehensive, yet fragmented, legal framework for climate action, with no clear implementation pathway. The NEPA (2007) set an overarching legal framework for environmental protection and management, while the Environmental Assessment Act (2000) and its supporting regulations require environmental impact assessments (EIAs) for all major projects. But the government’s technical capacity to conduct robust EIAs is weak, particularly at local level, where implementation capacity is critically lacking (World Bank 2024d). The Water Act (2011) and its associated regulations aim to promote sustainable, integrated water resource management, but the capacity to develop and implement river basin management plans remains limited (see, for example, NEC 2021). Although climate change is well integrated into sectoral plans and explicitly referenced in the energy and other sector strategies and policies, there is limited evidence that these commitments have been effectively translated into practice. Bhutan’s energy sector prioritizes the development of renewable energy sources, particularly hydro- power, to mitigate GHG emissions and enhance energy security. The Alternative Renewable Energy Policy (2013) outlines strategies to expand hydropower generation, promote energy efficiency, and integrate renewable energy into the national grid, while the Bhutan Sustainable Hydropower Development Policy (2008) and Economic Devel- opment Policy (2010) support energy diversification, and the country is slowly making inroads into solar (Gyeltshen 2022). The National Energy Efficiency and Conservation Strategy (2019) promotes energy efficiency measures across various sectors to mitigate climate change impacts, but implementation challenges persist (IRENA 2019). Similarly, climate considerations are streamlined into the agriculture, forestry, water, disaster management, trans- port, and tourism sectors. The forestry sector integrates climate change considerations through the Forest and Nature Conservation Act (2023) and National Forest Policy (2020), which both promote sustainable forest management and conservation, enhancing carbon sequestration. In agriculture, the National Framework for Organic Farming (2006) and CSA Strategy encourage sustainable practices that reduce GHG emissions. The water sector addresses climate impacts through the Bhutan Water Policy (2007) and the National Integrated Water Resources Management Plan (2016), which focus on managing water scarcity and improving water quality; yet gaps remain in implementation at basin level. The Disaster Management Act of Bhutan (2013) aims to strengthen institutional capacity for disaster management but lacks explicit linkages to adaptation. The transport sector, guided by the Draft National Transport Policy (2006, updated 2017), emphasizes sustainable and energy-efficient transportation modes. The Tourism Policy (2019) promotes ecof- riendly tourism practices to minimize environmental impact and support climate change adaptation. Despite these policies, significant barriers remain in translating climate goals into coordinated, on-the-ground action (RGoB 2020). Strengthening institutional capacity to manage and protect public assets is essential for resilient growth. Establishing a fully centralized national water information system would help ensure regulated, updated data for all water subsectors to inform effective water resource planning, monitoring, and management. In the energy sector, establishing an operational and functioning response plan with adequate staff and funding to respond to outages, dam breaks, and other natural hazards would help minimize disruptions caused by climate shocks. Improving systematic and comprehensive EWS specifically for agriculture that can produce and disseminate infor- mation to producers on crop and livestock price trends and forecasts, weather and climate forecasts, and pests and diseases would strengthen resilience in the sector. Efforts are underway to pilot an agricultural insurance system (World Bank 2024), to bridge a key gap on insurance coverage and the consideration of climate change-re- lated risks. Addressing institutional inefficiencies, strengthening enforcement capacity, and enhancing community engagement are also key to improving sustainable forest management. Building on its strong national climate strategies, Bhutan must now focus efforts on integrating these goals into updated sectoral and local plans. Many sector policies and plans predate the LTS and NAP and need to be updated to reflect the targets set in these overarching, long-term national climate plans. While local governments have prepared disaster management and contingency plans, most are outdated and would benefit from updates using better data. Bhutan has made considerable progress in strategic planning and has master plans for key B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 92 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action sectors—including highway connectivity, roads, irrigation, transmission grid, power, and e-government—but addi- tional master plans are required, for urban and interurban mobility, among others. Undertaking a resilient road assessment would ensure climate change mitigation and adaptation are better incorporated in master plans. Updating the 2018 building codes would help guide development in flood-prone areas and introduce postcon- struction building maintenance responsibilities. The MoIT currently drafts flood management plans, and local governments should play a strong role in this process. Establishing heat adaptation plans at district and subdis- trict levels would complement the NAP’s suggested investments in green infrastructure and resilient building design regulations, while prioritizing multiuse green spaces in cities would help lower urban temperatures (RGoB and World Bank 2024b). Institutional constraints and coordination challenges, particularly in water management, continue to hinder effective implementation across many sectors (Tariq, Wangchuk and Muttil 2021; NEC 2016). While climate change is a policy priority in Bhutan and embedded in its environmental framework, there is no dedicated climate law. Although constitutional provisions and the NEPA integrate climate within environmental protections, the lack of specific climate legislation creates gaps in implementation. Global research suggests that climate framework laws can provide a cohesive legal foundation for climate action, strengthening governance, political consensus, and public engagement, driving long-term climate action and resilience by ensuring the effec- tive implementation of climate policies, enhancing institutional capacity, and empowering civil society (Averchen- kova et al. 2024; Box 9). Bhutan’s 2020 Environment Strategy addresses both climate mitigation and adaptation, while its Climate Change Policy (2020) provides guidance to ensure carbon neutrality, resilience, and stakeholder engagement. These frameworks underscore the need for mainstreaming, coordination, and effective policy imple- mentation, laying the foundation for a dedicated climate change law to further Bhutan’s environmental goals. Box 9. Best practice for climate change legislation Framework climate change legislation is essential for ensuring the long-term commitment and stability needed to achieve national decarbonization and adaptation goals. Maintaining net carbon emissions at zero requires proactive policies that restructure economic activity, promote clean energy, enhance efficiency, and preserve carbon sinks, while adaptation strengthens resilience against climate risks, protecting households and businesses. Given that these transitions require investments with long lead times, legislation provides certainty across political cycles, encouraging businesses and individuals to align their behavior with climate goals. Unlike executive policies, laws are more difficult to reverse, reinforcing policy continuity and market confi- dence. Legislation also facilitates efficient markets by incorporating economic instruments such as carbon pric- ing, ensuring businesses and consumers internalize the cost of emissions. It also establishes clear institutional mandates, preventing overlaps and promoting coordinated climate action. Finally, an effective framework law balances predictability with flexibility, allowing for adjustments based on scientific advancements, technological progress, and international commitments. Countries with institutional climate change frameworks include: • Mexico (2012): Establishes the National System on Climate Change (SINACC), which integrates federal, state, and municipal actors • Peru (2018): Defines mandates for national, regional, and local authorities, and creates oversight bodies • United Kingdom (2008): Establishes the Climate Change Committee for independent advice and oversight. Source: World Bank 2020c B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 93 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action 5.3. Technical climate adaptation and mitigation capacity Bhutan faces significant barriers to effective climate change adaptation due to challenges in institutional coordination, technical capacity, and awareness. A skills assessment as part of the NAP process revealed criti- cal gaps in technical capacity despite ongoing training efforts, particularly in areas such as climate finance, data analysis, and model interpretation (NEC and UNDP 2022). The NEC Secretariat and NCHM also need to improve their coordination and strategy integration skills, with key challenges including high turnover of civil servants, fragmented awareness efforts, and limited access to data, especially in remote regions. Rapid development has made it difficult to integrate environmental criteria into planning, and financial constraints further limit Bhutan’s ability to implement sustainable adaptation strategies effectively. Bhutan’s central ministries and local government institutions face critical skill gaps in vulnerability assess- ments, adaptation budgeting, integrating climate change into policies and budgets, and other key areas. The NAP assessment found that, while NGOs and CSOs demonstrated strong climate adaptation skills, private sector engagement was minimal and limited to project-specific activities. Academic and research institutions would bene- fit from a unified platform to align research findings with national capacity-building priorities. While Bhutan has foundational capacities in place for climate adaptation, more coordinated technical upskilling would enhance the overall effectiveness of the NAP process (NEC and UNDP 2022). For climate mitigation, Bhutan’s experience with its three national communication submissions to the UNFCCC reveals ongoing gaps in technical expertise and institutional frameworks, particularly for GHG inventory manage- ment. The National Technical Working Group, reconstituted for each communication, lacks continuity, impeding data collection and emissions estimation efficiency. To address these gaps, the NEC Secretariat plans to institutional- ize a permanent networking group, expanding membership to include NGOs, academic institutions, and experts, and establish data-sharing protocols with industries to improve the accuracy of GHG data. The Capacity-building Initiative for Transparency will focus on developing energy data directories and setting up robust MRV systems. The lack of formal coordination between the NSB and sectoral agencies leads to inconsistent data quality. To enhance data collection and analysis, the NEC Secretariat plans to develop an online data submission system and more rigorous quality assurance mechanisms. A national GHG database and better inventory compilation process, including partnerships with external institutions, should improve GHG tracking. But Bhutan continues to rely on default emissions factors, highlighting the need to develop country-specific data to enhance the accuracy of climate reporting. Interviews with technical agencies, including the DECC, suggest that limited in-house exper- tise and staff turnover are ongoing challenges at both national and local levels. 5.4. Local governments and climate change Local governments in Bhutan are crucial for managing local development, resources, and services, and ensur- ing governance that addresses community needs. The Local Government Act establishes the dzongkhag tshogdu and gewog tshogde as decision-making bodies at district and village block levels, respectively. They are respon- sible for creating and implementing development plans that align with national priorities, focusing on resource management, agriculture, rural development, and urban planning in the thromdes. Local governments also play an essential role in DRM and enforcing environmental policies related to urban infrastructure, waste management, and green spaces. Bhutan’s highly regulated local planning system emphasizes community participation and follows a bottom-up approach, ensuring that citizen inputs shape development plans. Local representatives gather feedback from villages, which is discussed in gewog tshogde and dzongkhag tshogdu, before being integrated into the broader B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 94 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action . Local governments are also pivotal in implementing the 13th FYP national FYP , with targets for economic develop- ment, social service provision, disaster management, and climate change adaptation. The Resource Allocation Framework includes climate change criteria, ensuring local government funding reflects vulnerability to climate impacts. Bhutan’s Climate Change Policy and NAP assign local governments significant responsibilities in climate adap- tation and mitigation. Local governments are tasked with preparing climate strategies, advocating for awareness, and incorporating Indigenous knowledge into resilience planning. They play a key role in implementing adaptation measures for water management, agriculture, and disaster risk reduction. But they also face capacity challenges, with staffing shortages in key areas such as architecture and engineering, and limited awareness of climate change issues. Bhutan’s NAP and LTS recognize the need to build local capacity and improve coordination between local governments and national bodies to effectively address climate risks. Implementing measures to stabilize the tenure of employees in local government positions would allow for greater specialization in municipal administra- tion, while training, exchange visits with specialized entities in other countries, and a secondment program would broaden the experience and exposure of key staff and help address capacity constraints. Bhutan has established a climate-responsive fiscal transfer system, with local governments primarily funded through annual block grants (World Bank 2023b). These grants are used for various capital expenditures, includ- ing those related to climate adaptation; in the FY21/22 budget, local governments were allocated 34 percent of the total budget (World Bank 2023b). The 13th FYP introduced a resource transfer framework that integrates climate change vulnerability into the funding criteria, requiring local governments to align their plans with national climate goals. But a recent assessment of Bhutan’s PFM system highlighted that, while there is a clear frame- work outlining local governments’ responsibilities for climate action, the resources transferred are not enough to fully meet these obligations, and an evaluation of local government performance in climate-related activities is missing (RGoB 2023b). Local governments have had some success in managing locally-led climate adaptation projects (Box 10), nota- bly through the Local Climate Adaptive Living Facility (LoCAL), which channels climate finance directly to local governments via performance-based climate resilience grants. These grants help local governments climate-proof infrastructure investments, funding projects such as climate-resilient roads, irrigation systems, and flood protec- tion measures. LoCAL is unique in that it empowers local governments by allowing them to prioritize and manage their own climate adaptation projects while also building local capacity through performance-based incentives. But despite its effectiveness, LoCAL has not yet been fully institutionalized in Bhutan’s broader planning and budgeting processes, raising concerns about its long-term sustainability once external donor funding ends (UNCDF 2021). Although LoCAL has influenced Bhutan’s broader fiscal reforms, the country has yet to integrate climate adap- tation into these reforms at national level. Local governments have become more adept at incorporating climate adaptation into their projects and even applying for external funding—for example, from the GCF—but nearly all performance-based climate resilience grant funds have been allocated to infrastructure projects, reflecting local governments’ immediate infrastructure needs. As Bhutan considers scaling up LoCAL or seeking further adapta- tion funding, aligning future investments with its NAP priorities will ensure a strong focus on climate resilience. Local governments need to activate existing institutional structures to improve disaster response. The 2013 Disaster Management Act mandates the establishment of disaster management committees at dzongkhag level and subcommittees at thromde level, activated by heads of local government. But these committees have yet to be mobilized to manage floods or landslides during the monsoon season, limiting their opportunity to strengthen emergency protocols, coordination, and SOPs, and municipal-level emergency operation centers have not been systematically introduced. The Department of Local Government and Disaster Management could consider setting triggers for activating these committees, B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 95 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action Box 10. Bhutan at the forefront of community-level adaptation Bhutan has implemented several community-level initiatives to enhance climate resilience in various sectors. Programs like the Tarayana Foundation’s Springshed Management Initiative and Advancing Climate Resilience of the Water Sector address water scarcity by restoring springs, improving irrigation, and strengthening water- shed governance. The UNDP’s climate and disaster-resilient housing program builds earthquake-resistant and climate-adaptive homes using local materials, while its community-based climate adaptation projects support sustainable agriculture, rainwater harvesting, and human-wildlife conflict mitigation. Initiatives like the Himalayan Environmental Rhythms Observation and Evaluation System (HEROES) engage students and communities in climate monitoring and awareness. Collectively, these activities strengthen Bhutan’s adaptive capacity, ensuring local communities are better prepared for climate risks and environmental challenges. They are supported by a range of institutions, includ- ing RGoB, Tarayana Foundation, Bhutan Foundation, UNDP , United Nations Capital Development Fund, Global Envi- ronment Facility, and local municipalities. While such initiatives have improved resilience in many communities, long-term sustainability often depends on continued financial support, local capacity building, and institutional coordination. Source: https://www.youtube.com/watch?v=MKTZ1whjt5o; https://undp-bhutan.exposure.co/build-to-last; https://www.undp.org/bhutan/stories/promoting-com- munity-based-climate-adaptation; https://www.bhutanfound.org/our_work/climate-change-research/ 5.5. Constraints on effective implementation Despite Bhutan’s ambitious climate goals and comprehensive regulatory frameworks, effective implementation of climate policies remains a challenge. Institutional fragmentation is one of the primary barriers, as multiple agencies are tasked with climate-related responsibilities without clear coordination mechanisms (Box 11). The NEC lacks the necessary technical and human resources to enforce climate action across ministries and local governments. The lack of technical expertise within key government bodies—including the DECC, which provides technical support to the NEC—and local governments, is a major constraint. High turnover rates and insufficient staff train- ing on climate issues—particularly in areas like climate finance, EIAs, and vulnerability assessments—weaken Bhutan’s ability to address climate challenges. There are also significant gaps in data collection, sharing, and analysis, particularly in GHG inventory management and climate modeling. This lack of robust data infrastructure limits the country’s ability to conduct accurate climate risk assessments and monitor progress. Bhutan’s monitor- ing and evaluation systems for tracking climate actions are also underdeveloped, particularly at local level. The lack of systematic evaluations of local government performance in climate-related activities prevents the identifi- cation of gaps and hinders continuous improvement in implementation. The lack of financing for climate action, including from local resources, is another significant constraint. Bhutan has yet to fully explore domestic financing options, such as PPPs and carbon markets, which could provide sustainable revenue streams for climate initiatives. Its PFM system is in the early stages of integrating climate considerations and has limited mechanisms for tracking climate-related expenditures and aligning budgets with climate strategies. It needs stronger mechanisms to monitor climate-related fiscal risks, implement climate-respon- sive public procurement, and develop systematic appraisal guidelines for climate-related projects. The country’s climate-related tax management, audit, and examination and enforcement activities are basic (World Bank 2023c, B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 96 5 . E nhancing coordination at local , national, and regional levels : a key to effective climate change action Box 11. Institutional readiness and coordination for climate action in Bhutan Bhutan’s institutional readiness for climate governance relies on a complex but evolving framework designed to clarify roles, strengthen coordination, and ensure accountability. Key institutions and mechanisms include: • NEC: The apex body for climate governance, the NEC functions as the high-level National Climate Change Committee, providing strategic guidance, overseeing climate change coordination, and ensuring alignment across sectors. • C4: Operating as a forum for discussing and coordinating climate-related matters, C4 monitors the imple- mentation of climate policies and advises the NEC on emerging issues. • NEC Secretariat/DECC: As the lead technical body for climate policy, DECC is responsible for preparing , NDCs, and LTS, and supports the NEC and C4 in coordinating climate national strategies, including the NAP action across sectors. • MoF: Manages climate finance, including resource mobilization, allocation, and fiscal policy alignment, ensuring the financial sustainability of climate actions. • Line ministries, agencies, and local governments: Implement and integrate climate change considerations into their respective sectors, ensuring alignment with national strategies. While their roles are outlined in the 2020 Climate Change Policy, recent evaluations highlight ongoing gaps in coordination, particularly at local level, where stakeholder engagement remains a shared but ambiguously defined responsibility. Source: World Bank (forthcoming), based on DECC 2023a, 2023b; UNDP 2024 2023a). Its approach to assessing and prioritizing compliance risk is only partially structured and systematic: fuel importers and vehicle owners are required to register with RGoB, but this database is not consistently linked to the taxpayer database, and there is no documented compliance improvement plan, with penalties for noncompli- ance. Although the green tax rules and regulations were updated in 2024, Bhutan has no stock of green tax-related arrears. Bhutan has been collecting a sustainable development fee from tourists as an innovative mechanism to finance sustainable development since 2022. Dominating the energy and transportation sectors, SOEs have a significant impact on Bhutan’s climate goals; but they face oversight and transparency challenges. SOEs are vital for climate mitigation, especially in the hydropower sector. But they also need to enhance their role in climate resilience, by incorporating climate risk assessments and adaptation measures into their operations. But with no requirements for portfolio and enter- prise-level climate risk assessments, SOEs do not systematically incorporate climate change considerations in their management and disclosure, and consolidated, stand-alone, SOE portfolio performance reports have not been prepared since 2021. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 97 6. POLICY RECOMMENDATIONS B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 98 6 . P olicy recommendations The recommendations outlined in this chapter emphasize a coordinated, multisectoral approach to enhance Bhutan’s climate resilience and diversify its economy. By strengthening critical sectors, Bhutan can build resil- ience against climate risks while fostering economic diversification. Expanding access to climate finance, improv- ing governance frameworks, and strengthening institutional capacities will help ensure long-term sustainability. Implementing these strategies with collaboration between government agencies, the private sector, and local communities will support Bhutan’s vision for a climate-resilient and inclusive development pathway. 6.1. Enhancing climate resilience in key sectors Enhancing climate resilience across key sectors will require a multifaceted approach, focusing on hydro- power, agriculture, and urban infrastructure. Improved risk assessments, infrastructure upgrades, and regional collaboration on water security and climate-adaptive energy trade will strengthen resilience in the hydropower sector, while investing in modern agricultural inputs, digital solutions, and financial risk management mecha- nisms will help safeguard food security and rural livelihoods. Integrating climate resilience into urban land-use planning, flood protection, and disaster preparedness will help mitigate climate risks in cities and infrastruc- ture. Table 13 summarizes the policy recommendations for resilient hydropower, CSA, and resilient cities and infrastructure, with suggested interventions, expected time horizons and key government agencies responsible for implementation. Table 13. Policy recommendations for enhancing climate resilience in key sectors Objective Suggested interventions Time horizon Major action takers Resilient hydropower Strengthen hydropower resilience Adopt risk-based dam classification, develop SOPs for Medium to long MoENR, NCHM and manage environmental risks GLOF monitoring, conduct hydrological studies, and term integrate multi-hazard assessments Enhance water security Develop watershed reforestation, riparian zone resto- Medium to long MoAL, local governments, ration, and sedimentation management to regulate term watershed management water flow and reduce erosion division Support climate change mitiga- Explore opportunities for regional hydropower trade and Medium to long DGPC, MoFAT, regional tion through regional hydropower storage with BBIN partners to support renewable energy term BBIN energy partners trade integration in South Asia Reinforce DGPC capacity for Increase DGPC manpower and training, build part- Short to DGPC, MoEA, strate- expansion nerships for technical and financial support, and medium term gic partners, interna- enhance capacity in procurement, financial, and risk tional development management organizations B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 99 6 . P olicy recommendations Objective Suggested interventions Time horizon Major action takers CSA Facilitate market access International market access can be facilitated through Short or MoAL, private sector “aggregators” who help aggregate, provide storage and medium term quality control facilities to increase the marketability of agricultural produce. Strengthen financial incentives RGoB provides financial incentives for CSA technology Short to MoAL, MoF, private sector for CSA adoption adoption through its cost-sharing mechanism, which it medium term can strengthen by clarifying and targeting the selection process. Agricultural insurance products can be made more attractive by including coverage for all major climate events. Disseminate CSAIPs Make policy makers more aware of CSA benefits and Immediate MoAL organize investment forums to promote CSAIPs; inform private investors about profitable opportunities in CSAIPs; educate farmers on the economic advantages of CSA packages and the importance of co-financing Upgrade input and service Implement agricultural and livestock bills to allow Immediate MoAL, private sector, ecosystems import of modern inputs; invest in adaptive research; local governments strengthen public-private advisory systems with farmer field schools and digital solutions; develop climate- smart storage and transport infrastructure and services Reduce investment risks and Strengthen agrometeorology for farm advisories; Short term MoAL, private sector, transaction costs expand smart irrigation; improve finance access financial institutions, through matching grants and financial literacy training local governments Strengthen foundational data for Develop a farm registry to improve subsidy targeting; Medium term MoAL, NSB, agricultural programming establish information systems for food safety and trace- finance bodies ability; provide concessional financing for CSAIPs Leverage public investments Repurpose public agricultural expenditures to provide Medium term MoAL, MoF grants to invest in CSAIPs; and use public investments for creating a suitable ecosystem for CSA investments. Resilient cities and infrastructure Incorporating climate resilience Include resilience in urban and transport planning; Short to Urban planning authori- in urban and infrastructure densify in areas with low risks; enhance crisis prepared- medium term ties, local governments, planning ness and response; improve urban resilience data; DECC develop multi-hazard EWS Investing in climate resilient Floodproof vulnerable buildings, apply high standards Medium to long Local governments, MoIT, infrastructure to new buildings, adapt road networks and bridges, term Ministry of Information invest in NBS and passive cooling, and strengthen and Communications service delivery through digitization and improved O&M B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 100 6 . P olicy recommendations 6.2. Diversifying the economy and creating green jobs To diversify the economy and create sustainable green jobs, Bhutan needs strategic investments in skills devel- opment, tourism, and forestry. Expanding training programs for high-skilled green jobs while addressing labor market mismatches can enhance employment opportunities and reduce brain drain. Strengthening cultural and adventure tourism with climate resilience and sustainable practices can boost growth while preserving Bhutan’s unique heritage. In the forestry sector, promoting sustainable resource use, value-added wood industries, and community-driven forest management can generate employment and ensure environmental sustainability. Table 14 summarizes the policy recommendations for diversifying the economy and creating jobs, with suggested inter- ventions, expected time horizons, and key government agencies responsible for implementation. Table 14. Policy recommendations on diversifying the economy and creating jobs Objective Suggested interventions Time horizon Major action takers Green jobs and skills Develop and implement green Create training programs for high-skilled green econ- Short to MoICE, educational institu- skills training programs omy roles; collaborate with educational institutions and medium term tions, industry stakeholders industry; develop short-term or on-the-job green skills training for low-skilled workers Promote green jobs through Use industrial parks as hubs for green industries Medium to MoICE; MoF; MoENR; BCCI sustainable industrial with targeted financial support and policy incentives; long term development promote plug-and-play facilities for MSMEs; foster synergies among firms and invest in shared environ- mental infrastructure (e.g., wastewater treatment); adopt the principles of the international Eco-Industrial Park Framework Align workforce supply with green Conduct regular labor market assessments, implement Short MoICE, MoESD, NSB, labor market demand labor market information system for skills gap analysis term and employers and establish a robust labor market information system continuous to match job seekers with green job opportunities Green tourism Promote cultural tourism to Enhance branding and protection of cultural sites; inte- Medium to MoHCA, Tourism Council, enhance heritage conservation grate climate resilience into cultural heritage manage- long term local governments and climate resilience ment; manage high visitor concentrations to reduce pressure on key sites Expand adventure tourism to Support ecotourism and nature recreation in protected Short to Department of Tourism, generate green jobs and support areas; introduce service charges for facilities; use medium term MoAL, private sector climate action untapped carrying capacity to sustain natural assets and create jobs Develop wellness tourism aligned Collaborate with public and private sectors to develop Medium to Department of Tourism, with Bhutanese values and wellness tourism; emphasize traditional Bhutanese long term private sector, health and climate priorities wellness practices; align wellness services with environ- wellness providers mental protection and climate goals B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 101 6 . P olicy recommendations Objective Suggested interventions Time horizon Major action takers Sustainable forestry Balance conservation and Reform policies to support sustainable resource use; Medium to MoAL, financial institutions, economic development in the improve access to finance, technology, and infrastruc- long term local governments forest sector ture for forest sector development Enhance sustainable forest Implement forest management plans; conduct thin- Short to DoFPS, community forest management practices ning operations; upgrade equipment; train personnel; medium term management groups strengthen community forestry initiatives Expand value-added wood and Support small-scale wood product industries; diversify Medium to MoEA, SMEs, community NTFP industries NTFP value chains; promote ecotourism and payment long term groups for ecosystem services; facilitate market access through branding and certification Encourage private sector partici- Establish clear policies for private sector participation; Medium to MoEA, financial institutions, pation in forest-based industries increase access to finance; offer incentives; modernize long term private sector production techniques; train local entrepreneurs and SMEs Adopt a market-based approach Transition to auction-based timber pricing; incorporate Medium to Natural Resource Pricing to timber management sustainable forest management in auctions; develop long term Committee, DoFPS, private digital platforms for market transparency sector Strengthen forest governance Revise laws to strengthen penalties; improve monitor- Short to DoFPS, MoHCA. and law enforcement ing with geographic information systems and drones; medium term address personnel shortages; enhance cross border collaboration with India Notes: BCCI = Bhutan Chamber of Commerce and Industry DoFPS = Department of Forests and Park Services; MoEA = Ministry of Economic Affairs; MoHCA = Ministry of Home and Cultural Affairs. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 102 6 . P olicy recommendations 6.3. Securing climate finance Bhutan’s climate finance strategy must address key sectoral challenges while ensuring sustainable economic growth and resilience against climate risks. As the backbone of the economy, hydropower requires innovative financing mechanisms, including PPPs, portfolio-level financing, and carbon market participation to attract invest- ments while maintaining macroeconomic stability. Expanding climate-smart financial products in agriculture—such as insurance schemes and targeted credit enhancements—will improve smallholder resilience and productivity. Cities and municipalities must strengthen revenue generation through better taxation, digital services, and prop- erty market transparency to finance climate adaptation and urban resilience. Forestry and conservation efforts can unlock new revenue streams through carbon markets, with enhanced MRV systems ensuring the credibility of carbon credits. Strengthening DRM through financial instruments, including risk layering, stabilization funds, and regional risk pooling, will enhance Bhutan’s ability to respond to climate shocks. Table 15 summarizes recom- mendations for financial sector development, public finance, and climate finance diversification across critical sectors and crosscutting themes, with suggested interventions, expected time horizons, priority levels, and key government agencies responsible for implementation. Table 15. Policy recommendations for securing climate finance Suggested interventions Time horizon Priority Major action takers Hydropower: Enhance financing and capacity for hydropower expansion Expand PPP models for hydropower projects Short to medium term H DGPC, MoF, MoENR Develop portfolio-level financing mechanisms Short to medium term H Druk Holding and Investments, DGPC, MoF Implement credit enhancement mechanisms (hedging, insurance) Medium term M MoF, RMA Leverage climate finance (green bonds, carbon credits) Short to long term H MoF, NEC, RMA Expand participation in global carbon markets Long term H NEC, MoF Agriculture: Improve financial access and resilience for farmers Improve financial literacy programs for farmers Short term H MoAL, BDB Scale up agricultural insurance schemes Short to medium term H MoAL, BDB, Royal Insurance Corporation of Bhutan Strengthen BDB for climate-smart finance Medium term H BDB, MoF Expand guarantee products to reduce lending risks Short term M MoF, RMA Mainstream CSA in credit assessments Long term M MoAL, BDB, RMA Cities and infrastructure: Enhance revenue generation and financial resilience Reform local tax collection systems Short to medium term H MoF, thromdes B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 103 6 . P olicy recommendations Suggested interventions Time horizon Priority Major action takers Implement digital public services to improve efficiency Short term H Ministry of Information and Communication, MoF Improve property market transparency through better valuation Medium term M MoIT, National Land Commission Secretariat Forestry and conservation: Unlock carbon finance and sustainable revenue streams Enhance MRV for carbon credits Medium term H NEC Develop carbon-linked financial instruments (e.g., carbon bonds) Medium term M MoF, RMA Direct green tax revenues toward conservation investments Long term M MoF DRM: Strengthen financial preparedness for climate risks Implement risk layering strategies (e.g., insurance, contingency funds) Short term H MoF, DDM, RMA Outline a new fiscal strategy with a long-term vision to channel a share Medium term H MoF of hydro revenue for productive capacity building in the economy Explore regional disaster risk pooling mechanisms Long term M MoF, DDM Financial sector: Expand climate finance and financial inclusion Expand financial literacy and digital inclusion Short term H RMA, MoF Shift toward risk-based lending practices Medium term H RMA, BDB Implement the Green Finance Roadmap Medium term M MoF, RMA Develop a sovereign green bond framework Long term M MoF, RMA Public finance: Enhance public investment efficiency and mobilization Reform public investment management for climate projects Medium term H MoF, OCASC Leverage the NPPF for climate investments Long term M NPPF, MoF Climate finance diversification: Expand financing sources and reduce dependency on grants Optimize concessional finance for climate projects Short term H MoF, MoFAT Expand CSR financing Short term M MoF, BCCI Increase carbon market participation through strategic planning Medium term H NEC, MoFAT Develop blended finance models to attract private investment Long term M MoF, RMA, BCCI Note: H = high; M= medium; DDM = Department of Disaster Management. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 104 6 . P olicy recommendations 6.4. Strengthening institutions for climate action To support Bhutan’s climate-resilient development pathway, targeted institutional reforms are essential to strengthen climate governance, build technical capacity, and mainstream climate considerations into national and local planning systems. Table 16 summarizes a set of priority institutional reforms and associated interven- tions that aim to enhance the effectiveness, transparency, and inclusiveness of climate action in Bhutan, with expected time horizons and major action takers. These reforms span legal, technical, and participatory dimen- sions, focusing on improving coordination among key agencies, expanding data and expertise for climate deci- sion-making, and promoting engagement with CSOs and the private sector. They are designed for implementation over short, medium, and long-term time horizons, and require the involvement of multiple government ministries, local governments, academic institutions, and community stakeholders. Table 16. Policy recommendations for strengthening institutions Institutional reforms Suggested interventions Time horizon Major action takers Strengthen institutional frame- Revive and institutionalize multisectoral coordination Short to NEC, DECC, ministries, work, coordination, and groups and ensure regular C4 meetings to integrate climate medium local governments governance priorities into national and local planning processes; clar- Medium to ify agency mandates for climate action; empower NEC and long term DECC by providing sufficient budget and staffing; enact a comprehensive climate change law Improve technical capacity for Launch comprehensive training programs on climate adap- Short to MoESD, local govern- climate actions tation, GHG inventories, and EWS for government officials medium term ments, academic insti- and technical staff, especially at local level; strengthen tutions, DECC national and local data infrastructure for GHG monitoring, climate modeling, and impact-based early warning services Strengthen monitoring, evalua- Conduct systematic climate risk assessments for plan- Short to DECC, local govern- tion, and transparency ning; operationalize the Bhutan Climate Change Platform medium term ments, NSB for public transparency; introduce physical and transi- Medium to tional climate risks reporting for SOEs; scale up digital long term MRV systems for comprehensive climate action tracking; fully integrate climate risks into public and private sector planning Integrate climate change into Align financial systems with climate goals track climate Short to MoF, MoIT, Public Invest- public finance and infrastructure expenditures medium term ment Unit planning Engage CSOs and the private Broaden structured engagement with CSOs, academia, Short to MoF, private sector in climate initiatives and local communities in climate resilience and mitiga- medium term sector, CSOs, local tion programs; expand fiscal transfers to local governments communities to support community-led climate initiatives; promote PPPs for climate mitigation and resilience by developing sector-specific guidelines and project pipelines in areas such as renewable energy, climate-resilient infrastructure, and CSA B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 105 APPENDICES B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 106 6 . P olicy recommendations APPENDIX A. CLIMATE MODELING AND SELECTION OF CLIMATE SCENARIOS To develop climate scenarios for the CCDR, historical data (1950–2020) were sourced from the Climatic Research Unit gridded Time Series of the University of East Anglia (CRU TS 4.05) dataset available at a spatial resolution of 0.5x0.5-degree grids and monthly temporal resolution for various variables including mean, maximum, and mini- mum temperature, and total precipitation. Future projections (1995–2100) were obtained from the World Bank’s Climate Change Knowledge Portal (CCKP) for 29 General Circulation Models (GCMs) from the Coupled Model Intercomparison Project 6 (CMIP6) suite of Intergovernmental Panel on Climate Change model outputs (World Bank 2021). This large suite of GCMs was run for a set of emissions scenarios, as shown in Figure A1. Figure A1. CMIP6 SSPs 120.0 100.0 80.0 6 0.0 40.0 20.0 0.0 -20.0 1980 2000 2020 2040 2060 2080 2100 Historical SSP1-1.9 SSP1-2.6 SSP4-3.4 SSP5-3.40S SSP2-4.5 SSP4-6.0 SSP3-7.0 SSP5-8.5 Notes: Shaded area shows range of no-policy baseline scenarios; Interactive version with more data available at Carbon Brief: https://www.carbonbrief.org/ cmip6-the-next-generation-of-climate-models-explained. CMIP6 models simulate climate futures under different Shared Socioeconomic Pathways (SSPs) and Representa- tive Concentration Pathways (RCPs), including SSP1–2.6 (low emissions, strong mitigation), SSP2–4.5 (moderate emissions, business-as-usual), and SSP3–7.0 (high emissions, limited mitigation). Given that GCMs are biased relative to observed climate conditions, bias-correction and spatial disaggregation techniques were applied to disaggregate the projections to 0.5x0.5-degree grid cells, and to then bias correct these projections using the observed historical dataset from 1995 to 2000 from the CRU TS 4.05 dataset. For each grid cell, the bias correc- tion procedure sets up “quantile maps” for each month to statistically compare the GCM hindcast to the CRU observations and then uses those maps to bias correct all projections. This approach was previously applied in Cervigni et al. (2015), using the CMIP5 ensemble. B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 107 6 . P olicy recommendations Standard spatial downscaling practice to reduce the spatial resolution from 1x1-degree grids to 0.5x0.5-degree grids and properly line the data up with the historical data, both reduced to the 67,420 CRUs of the CRU TS 4.05 data covering the land area of the globe includes the following steps for each file: • Obtaining the raw data (resulting spatial dimensions are 181 latitude x 360 longitude)64 • Performing inverse distance weighting with a multiplier of 2, power of 2, and radius of 2 to increase the resolution to 0.5x0.5 degree (resulting spatial dimensions are 362 latitude x 720 longitude) • Removing the 1st and 362nd latitude rows, because centroids of the original 181 1-degree latitude bands range from -90 to +90, which means that latitude bands at -90 and +90 are each only 0.5 degree, rather than 1 degree. As a result, removing the 1st and 362nd reduces the size of these bands to 0.5 degree (resulting spatial dimensions are 360 latitude x 720 longitude) • Reducing and vectorizing the data to the 67,420 CRUs covering the land areas of the glove (resulting spatial dimensions are 67,420 CRUs). The available set of GCM/SSP permutations were analyzed to obtain a subset of scenarios that represent an appropriate range of possible future climate conditions. In particular, two different sets of climate futures—one to assess the impact of uncertain global mitigation efforts and one to assess local climate risks and overall model uncertainty—were considered.65 While scenarios that capture model uncertainty are relevant for any impact chan- nel, certain inputs may be limited to SSP aggregates only. In those cases, the analysis relies on scenarios of global mitigation efforts alone. The first set of scenarios (those selected to allow for comparisons across emissions trajectories, referred as miti- gation scenarios) were selected in accordance with World Bank guidance, which recommends selecting an optimis- tic and a pessimistic scenario of greenhouse gas (GHG) concentrations that are driven by global GHG emissions trajectories and mitigation policies.66 For these, the SSP3–7.0 ensemble mean is used as a pessimistic case and the SSP1–1.9 ensemble mean as an optimistic case. SSP1–1.9 represents reductions in GHG emissions in line with 1.5°C warming by 2100, while SSP3–7.0 is a scenario in which warming reaches 4°C by 2100, due to lax climate policies or a reduction in ecosystems and oceans’ ability to capture carbon. For the second set of scenarios (selected to assess overall model uncertainty), a subset of extreme GCM runs that represent a dry/hot and wet/warm future for the country under analysis for 2020–50, is selected. This process is made up of the following steps: 1. Calculate country-scale changes in mean annual temperature and mean total precipitation between 2031 and 2050 versus the historical baseline of 1995 to 2020. 2. Consider GCMs within the SSP2 and SSP3 ensembles (about 50 total), as potential candidates for extreme conditions, eliminating from consideration the aggressive mitigation pathway (SSP1) and the aggressive emissions pathway (SSP5). 3. Select three hot/dry scenarios around the 10th percentile of change in mean precipitation (dry) and 90th percentile change in mean temperature (hot), across all GCMs (within SSP2–4.5 and 3–7.0). Compute a 4th scenario as the mean across the three selected GCM/SSP runs. 64 The raw data have a spatial resolution of 181 latitude x 361 longitude. Based on communication with the CCKP team, the 361st longitude column was removed. 65 Climate model uncertainty: diverse GCMs have been developed drawing on the best available science. These continue to evolve, and while sophisticated, they remain imperfect tools. Each model is unique and generates slightly different projections, even when run using identical GHG emissions scenarios. 66 World Bank staff calculations, based on World Bank Guidance on Global scenarios for CCDR analyses, Feb 3, 2022 B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 108 6 . P olicy recommendations 4. Select three wet/warm scenarios around the 90th percentile of change in mean precipitation (wet) and 10th percentile change in mean temperature (warm), as above, and compute a 4th scenario as the mean. CCKP climate data are available at a monthly timestep. But many of the biophysical models used in this study rely on daily temperatures and precipitation. For the selected climate projections and historical baseline, the already downscaled and bias-corrected monthly data to a daily timestep are interpolated using a historical hindcast from 1948 to 2008 at a 05x0.5-degree gridded resolution from the Terrestrial Hydrology Research Group from Prince- ton University (Li, Sheffield and Wood 2010). Figure A2 shows the results of the climate scenario selection process. The scatterplot shows the distribution of SSP/GCM combinations based on changes in temperature and precipitation, highlighting those that were selected (including the ensemble mean scenarios for reference). Figure A2. GCM selection results for dry/hot and wet/warm futures Type # SSP GCM Dry/hot future 1 SSP2-4.5 GFDL-ESM4 2 SSP3-7.0 MIROC6 3 SSP2-4.5 MIROC6 Wet/warm future 4 SSP2-4.5 CMCC-CM2-SR5 5 SSP3-7.0 INM-CM5-0 6 SSP2-4.5 CMCC-ESM2 B H U TA N C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T 109 6 . P olicy recommendations APPENDIX B. 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