As companies work to address their Scope 3 emissions in a fast-changing market and regulatory environment, market-based instruments (MBIs) are emerging as a powerful way to unlock finance for value chain decarbonization at scale.

Many corporates are eager to invest in projects with positive climate impact, such as regenerative agriculture and energy-efficient processing. However, they face barriers like physical traceability, segregation, and data tracking due to the constant mixing and aggregation of goods within global value chains.

Market-based instruments offer a flexible way to incentivize and reward climate action even when there are limitations such limited traceability or when the reporting company doesn’t directly source the goods impacted by an intervention (for example due to blending of materials). MBIs also enable companies to account for climate projects within their value chains, while allowing for shared claims among co-investors.

Market-based instruments cover a broad set of approaches, including environmental attribute certificates (EACs), activity pools, and carbon pricing mechanisms among others. Read more about what current standards say about these approaches, how they may develop in the future, and what are examples of market-based instruments below.

What falls under the market-based instruments umbrella?

Market-based instruments, also known as market-based mechanisms, use economic tools to incentivize and account for greenhouse gas (GHG) reductions or removals with diverse accounting approaches.​ Usually, they work by embedding the cost of externalities from unsustainable practices into product market prices.​

In GHG accounting, MBIs are commonly associated with energy certificates for Scope 2 emissions and carbon credits in the voluntary carbon market. For Scope 3, companies are exploring a broader set of MBIs, though there is still no standardized framework defining a credible approach.

Broadly speaking, MBIs can be grouped into three categories:

1. Environmental Attribute Certificates (EACs) – including commodity certificates and carbon credits.

2. Activity pools or aggregation systems – such as Supply Shed models.

3. Other mechanisms – like carbon taxing, emissions trading systems, or carbon pricing. This may include regulatory instruments.

MBIs allow organizations to claim climate outcomes from interventions even when ​direct control or physical traceability is limited, often using accounting methods such as mass-balance or book-and-claim. This flexibility helps incentivize climate action and justify ROI on investments in value chain interventions.

Caption: Different types of market-based instruments.

Market-based instruments under current standards

Right now, most corporate GHG inventories can only include only physically traceable reductions. As a result, MBIs must be reported separately from the inventory, limiting recognition, co-investment and scalability. Furthermore, the absence of a standardized framework to define credible MBIs makes accounting and reporting difficult. 

However, the landscape is changing. Key standards such as the GHG Protocol and Science-Based Targets initiative (SBTi) are revisiting their guidance, creating an opening for more flexible yet credible Scope 3 action. 

GHG Protocol

The GHG Protocol — the leading global GHG accounting framework — currently does not allow market-based approaches to calculate Scope 3 emissions. It does, however, permit companies to report MBI transactions separately from the GHG inventory. Its ongoing Actions and Market Instruments working group will inform upcoming updates, potentially redefining how MBIs can be reported.

The GHG Protocol’s definition of market-based approaches includes:

– Value chain interventions (e.g., Supply Shed)

– Project-based crediting (e.g., offsets and insets)

– Chain of custody models (e.g., mass balance and book-and-claim).

Science-Based Targets initiative

The SBTi, a target-setting framework for reducing GHG emissions, focuses primarily on Environmental Attribute Certificates (EACs). Its draft for the Corporate Net Zero Standard V2 outlines a preference for EACs that are directly traceable to a company’s value chain.

The SBTi does not currently allow companies to use external carbon credits (outside the value chain) to meet emission reduction targets. Instead it prioritizes direct mitigation — actions tied to specific, traceable activities in a company’s value chain. As such, energy and commodity EACs which can be traced to a company’s value chain are the preferred use of EACs in the draft standard, and would be accounted as indirect mitigation.

Examples of market-based instruments for Scope 3

1. Environmental Attribute Certificates

The SBTi defines EACs as instruments that convey environmental- or sustainability-related characteristics of a given activity or commodity.

Within the SBTi’s Corporate Net Zero Standard V2, they fall into two broad categories:

Carbon credits

These certify the mitigation outcomes of projects that reduce, avoid, or remove carbon emissions. The SBTi proposes that investment in permanent carbon removals and related carbon credits can complement companies’ efforts to reduce their carbon footprint, but should never be a substitute for this. There are two use cases for carbon credits in the SBTi’s proposal:

• Beyond Value Chain Mitigation
• Neutralization of residual emissions

Energy, commodity and industrial certificates

These track the environmental performance of activities and include certificates from electricity, fuel, and commodities. Energy and commodity EACs which can be traced to a company’s value chain are the preferred use of EACs in the draft standard.

V2 of the Corporate Net Zero Standard introduces the concept of indirect mitigation, to be used in specific circumstances and for an interim period of time. This refers to the use of energy and commodity certificates when a company cannot directly trace emissions or when insurmountable barriers prevent them from mitigating emissions.

2. Activity pools and Supply Sheds

Even when companies are not able to trace their sourced products to individual suppliers, they may have an understanding of the region or set of suppliers from whom they source. Activity pools refer to the set of emission sources which may physically serve the reporting company, but where traceability to an individual source is not possible. An activity pool could be an upstream supply pool such as an electricity grid, but it also applies to some agricultural commodities where the origin of the commodity is not traced.

A Supply Shed, as defined by VCI, can be considered a type of activity pool. A Supply Shed is a group of suppliers in a specifically defined market, providing similar goods and services that can be demonstrated to be within the company’s value chain. It functions as a mechanism to aggregate suppliers for the purpose of GHG accounting.

3. Other approaches

Beyond the approaches mentioned above, some tools for reducing GHG emissions operated by governments can also be considered market-based instruments. These include carbon pricing mechanisms, such as carbon tax and emission trading systems (ETS).

Carbon tax

A carbon tax is a levy on the carbon or other GHG emissions content of fossil fuels. A carbon tax puts a price on emissions to encourage consumers, businesses, and governments to produce less of them. It provides incentives for producers and consumers alike to reduce energy use and shift to lower-carbon fuels or renewable energy sources.

Emission trading system

An emission trading system (ETS) – also known as cap-and-trade – is a tradable-permit system for GHG emissions. It sets a cap on the GHG emissions that can be emitted, and the government distributes the tradable permits among companies in specified industries. Power and industrial sectors are the most commonly seen in the systems operating around the world.

Challenges to adopting market-based instruments

Despite their potential, MBIs face adoption hurdles. These include:

– Limited incentives: Lack of formal recognition within current reporting frameworks discourages corporate action and co-investments in the value chain.

– Scaling difficulties: Suppliers struggle to scale impact without downstream support.

– Uncertainty: Standard bodies like the SBTi and GHG Protocol are still developing guidance – expected no earlier than 2027.

The Value Change Initiative’s Market-Based Instruments Program

As standards revisit the role of market-based instruments, this is a pivotal moment to shape their future—enabling credible claims, unlocking co-investment, and improving accountability across complex value chains. This is why the VCI is launching an MBI Program with the following aims:

– Harmonize understanding: Build shared knowledge and frameworks to align stakeholders around MBI use. ​

– Showcase case studies: Analyze real-world examples from specific sectors to uncover barriers and opportunities.​

– Empower action: Provide companies with tools and guidance to report, claim, and scale MBIs as part of climate strategies.​

– Influence standards: Amplify the collective voice of participants in ongoing standards updates.​

Join the MBI Program and be at the forefront of operationalizing MBIs – and credibly scale value chain decarbonization.​