Bhutan's energy and environmental situation and approaches to development are reviewed and analyzed in this paper. Conservation of natural resources and human happiness have been placed as central strategic policy themes and have been given high priority in the national development plans of Bhutan. Bhutan's unique approach to development via Gross National Happiness (GNH) or the Middle Path of development is being facilitated by the Royal Government of Bhutan as a tool to balance poverty alleviation, environmental conservation and development. However, challenges exist due to the constraints of resources, good governance, legal frameworks, and human capacity. This paper reviews selected sustainable energy projects (e.g. energy from renewables or energy conservation) in Bhutan and finds that in fact, Bhutan's renewable energy resources (e.g. water and forests) which have proved to be indispensable for development are vulnerable due to the adverse impacts of climate change and environmental degradation. Appropriate measures in order to reduce potential environmental degradation and mitigate climate change impacts have been acknowledged globally and these have potential for application in Bhutan. For example, implementation of sustainable energy projects under the Clean Development Mechanism (CDM) of the Kyoto Protocol could offer an opportunity for mitigating climate change impacts and also contributing to sustainable development.