Editor’s note: This is the first post in the five-part series ‘Market instruments explained’, where we examine the prospects and risks of market instruments in corporate emissions accounting. In the series, we cover key debates around chain-of-custody models, commodity certificates, multi-statement GHG inventories and transition targets. By bringing together perspectives from standard-setters, companies and civil society, we aim to bring more clarity to this complex but increasingly central topic.
The corporate accountability landscape has changed significantly since the first voluntary corporate greenhouse gas (GHG) emissions and target-setting standards emerged more than 10 years ago. Today, many large public companies regularly estimate their GHG emissions footprint and have set emissions reduction targets. A select number of companies have even made significant progress toward reducing their operational GHG emissions or have implemented some more easily accessible decarbonisation measures to address supply chain emissions.
Yet despite this evolution, major challenges remain. Progress on reducing supply chain emissions and implementing key sectoral transition measures is slow, as companies face roadblocks in sourcing low-carbon commodities and materials. Companies also report difficulties in claiming the emissions reductions associated with activities that occur beyond their value chain.
These challenges point to a deeper issue: current approaches to emissions accounting do not capture the full climate impact, be it positive and negative, of companies’ climate mitigation measures. This can create a gap between reported emissions and actual decarbonisation outcomes, potentially weakening companies’ incentives to decarbonise.
In response, companies are increasingly turning to market instruments, such as green steel certificates, to both decarbonise their supply chains and receive recognition for their efforts.
But can these instruments deliver real-world, system-level decarbonisation, especially in harder-to-abate sectors? Or do they risk creating the impression of progress without driving the structural changes needed? And what guardrails are needed to ensure that their growing use leads to genuine transformation instead of locking in technologies that are not future proof?
These questions are becoming more relevant as the Greenhouse Gas Protocol develops new guidance on the use of market instruments. A draft of this guidance is expected to be published for public consultation in late 2027.
In this blog post, we offer an overview of market instruments, their potential value and their risks, drawing on interviews with key company representatives, civil society organisations and various supply chain decarbonisation experts across the steel, agrifood and freight sectors.
What are market instruments?
Market instruments have a long history in corporate climate accountability. While the term covers a diverse set of tools, they share a common approach: utilising market and pricing mechanisms to address corporate climate challenges.
Well-known market instruments include commodity certificates, long-term offtake agreements and energy attribute certificates. Certain instruments are already widely used, such as renewable electricity certificates (RECs), which the GHG Protocol already allows for scope 2 market-based emissions reporting, and sustainable aviation fuel (SAF) certificates. Some companies have also begun claiming emissions reductions from market instruments in their scope 3 inventories, pointing to the need for clearer guidance and a common approach for all companies.
While some argue that market instruments can help companies demonstrate progress towards sectoral emissions-reduction pathways and accelerate decarbonisation at scale, existing market instruments such as RECs and voluntary carbon credits have a mixed track record.
Research has shown that RECs often do not drive the installation of additional renewable electricity capacity and therefore may have limited impact on emissions reductions in certain regions. Similarly, the voluntary carbon market has faced systemic integrity issues and also cannot replace real emissions reductions in company value chains. For these reasons, a previous proposal by the Voluntary Carbon Markets Initiative to integrate voluntary carbon credits into target-setting frameworks faced significant pushback. There is also a risk that integrating any form of market instrument into emissions reporting may ultimately discourage direct value chain decarbonisation.
The issue has now moved to the forefront of corporate climate discussions. In particular, the GHG Protocol has set up an Action and Market Instruments working group which will provide guidance on how companies can ‘completely and transparently report on impacts of actions and market instruments in a credible manner within a corporate GHG report.’
Why companies want to integrate market instruments into scope 1 and 3 emissions inventories
Companies may turn to market instruments for different purposes, and the rationale for integrating them into emissions inventories is often shaped by the specific barriers they face. These barriers may include challenges in supply chain accounting or difficulties in financing or gaining access to low-carbon technologies in those supply chains.
Market instruments can be used to help companies overcome the barriers to accounting for their emissions reduction measures.
Within today’s corporate accountability landscape, companies’ climate commitments are scrutinised largely through the lens of their emissions reduction targets. This puts pressure on them to reflect all their climate-related efforts in their emissions inventories. However, current accounting approaches, which often rely on industry averages rather than primary supplier data, struggle to capture the impact of lower-carbon procurement practices. While they can be effective at recognising efficiency improvements and fundamental business model changes, they cannot effectively track efforts for low-carbon procurement without primary supplier data or when the effects occur outside a company’s direct value chain.
Take the case of a dairy company which has direct relationships with its dairy suppliers. The company may be able to reduce emissions at the farm level, but it is much harder to influence emissions from feed production if it has no direct relationship with feed producers. If the dairy company wanted to adopt more accurate emissions accounting methods, it would need to collect primary data from its suppliers. This could involve significant efforts, which can be expensive due to long and fragmented supply chains. Instead, the company could purchase certificates for lower-emissions commodities traced back to the same region as its supply chain. In this case, market instruments can enable companies to claim mitigation outcomes in sectors where structural barriers limit emissions data traceability.
Market instruments could be used to incentivise the financing of capital-intensive decarbonisation technologies in the value chain.
Companies across sectors, especially those that are not consumer-facing, may lack strong incentives to decarbonise their supply chains. Our analysis highlighted two main incentives for companies: regulatory compliance and the ability to claim emissions reductions in their inventories and towards their emissions reduction targets.
Market instruments could incentivise companies to decarbonise by enabling them to demonstrate progress on key sectoral transitions. This in turn can incentivise producers to implement key decarbonisation measures by enabling them to recoup investment in costly and lengthy technological changes or fund further decarbonisation. For example, steelmakers may only be able to decarbonise parts of their production processes at a time due to financial and operational constraints. As only part of the plant has been refurbished, the steel sold by the steelmaker may include a mix of lower-emissions and conventional steel, creating a slightly lower-emissions steel. Selling a portion of that steel as ‘green’ at a premium to interested buyers through market instruments could provide the cash flow necessary to fund the replacement of energy-intensive processes in the future or enable recouping past investments.
Market instruments can be seen as a transition tool when the physical supply of lower emissions commodities or fuels is structurally constrained.
Market instruments could be needed to support technological transitions taking place beyond a company’s supply chain. For example, sustainable aviation fuels (SAF) and maritime fuels (SMF) are key decarbonisation measures for the freight sector. However, these fuels are not yet widely available across all airports or ports, as global supply remains limited. Linking the supply of fuels to the demand would require transporting fuels across long distances, leading to additional emissions and costs. In this context, market instruments could help connect demand and supply until sustainable aviation and maritime fuels become more available.
Although logistical constraints may justify the use of market instruments in certain sectors, there remains uncertainty on what criteria should determine which decarbonisation measures qualify for inclusion under market instrument frameworks.
The risks of allowing the use of market instruments without guardrails
Currently, market instruments cannot be counted towards scope 1 and 3 emissions inventories according to the GHG Protocol. The impact of any changes made to these guidelines will depend highly on the right guardrails being in place to reduce a number of associated risks.
Without appropriate guardrails, market instruments may risk rewarding existing practices rather than driving new emissions reductions.
If the rationale for using market instruments is to expand the development and use of breakthrough technologies, it is important that they support further emissions reductions beyond those that occur without them. In the steel industry, for instance, stakeholders reported that steel producers are selling certificates for lower emissions steel based on an increased share of scrap steel. However, the practice of recycling steel as part of production is already common practice and the sale of certificates may not necessarily increase it significantly. While this intervention may lower emissions at the product level, it does not necessarily go beyond ‘business as usual’ within the sector.
Without appropriate guardrails, meeting the surging demand for lower-emissions products may have unintended consequences.
While a market instrument could support a technology that reduces emissions in a particular sector, its use might cause other unintended risks. For instance, in aviation, almost all SAF on the market today is produced from biomass resources, which are limited in supply. Increased use of SAF in aviation may divert these resources from other sectors that also rely on them for decarbonisation, including the chemicals sector, power generation and land transport. Moreover, their production can also have negative effects on ecosystems and food security by competing for land with agriculture.
Without appropriate guardrails, market instruments could be used to invest in incremental action, potentially delaying system-level change.
Market instruments can support decarbonisation measures with varying levels of ambition in emissions reductions, but some interventions only deliver minor cuts. When companies purchase instruments for such low ambition interventions and make associated claims, they risk misrepresenting their impact and delaying the phase-in of high-ambition solutions. For instance, stakeholders expressed concern that steelmakers might use market instruments to delay the high capital investment needed for key technologies like Hydrogen Direct Reduced Iron (H2DRI) and instead advertise and sell the emissions reduction achieved through recycled steel. While this is a quicker and cheaper solution, it maintains the sector’s reliance on fossil fuels. Used this way, market instruments could legitimise incremental progress at the expense of commercialising breakthrough technologies. Establishing minimum technology or decarbonisation requirements for claims made using market instruments could help address this risk.
The need for balancing rigorous emissions accounting with deep decarbonisation
Our analysis shows that the risks associated with market instruments depend heavily on how and why they are used. When these instruments are presented as a way to track climate efforts and demonstrate a physical link to a company’s supply chain, it is essential that they do not mislead consumers or buyers about the true emissions footprint of a company’s products or operations. Conversely, when companies use these instruments to drive deep decarbonisation in sectors where strong demand signals are essential, their legitimacy hinges on whether the underlying intervention is real, additional and technologically material.
Although market instruments have faced integrity issues in the past, today’s debate is more nuanced. Different actors are advocating for rules that align most with the rationales they are prioritising, and some proposals are more rigorous than others. The standards set in the coming years will determine whether market instruments accelerate system-level decarbonisation or entrench approaches that fall short. Guardrails will be essential to distinguish frameworks capable of driving genuine progress from those that are merely ambitious in their claims.
The next blog post in this series will examine one of the key instruments at the centre of this discussion: mass balance chain-of-custody models.
