The Necessity of Market Instruments for Corporate Environmental Action
The climate finance gap serves as the fundamental barrier for keeping global warming under 1.5 degrees. The Intergovernmental Panel on Climate Change (IPCC) issued a call to at least triple current climate-related investments, and organizations like the Global Renewables Alliance are echoing this call.
Luckily, the financial floodgates have begun to open. Recent legislative packages in the United States, European Union, and beyond promise hundreds of billions of dollars in climate-aligned financing and incentives, accompanied by new climate-related disclosure requirements.
Major financial institutions have made commitments to deploy capital for massive investments in decarbonization. A fast-growing community of investors and venture capitalists are backing startups offering potential to scale up new hardware and software solutions.
However, financing will not begin moving on its own. An unlimited supply of solutions is worthless in the absence of market demand and transactions.
Market Instruments Facilitate Climate-Aligned Markets, Transactions, & Investments
Luckily, climate- and ecosystem-aligned transactions are beginning to flow. The products that facilitate these transactions include “market instruments” like energy attribute certificates (EACs), carbon offsets, and other environmental attribute certificates, which serve as both the currency for and receipt of doing good at scale. They represent a standardized product that companies can transact globally to advance environmental goals.
In practice, market instruments help businesses and investors assess options, execute transactions en masse, verify completed transactions, deliver additional revenue to clean energy and carbon offset developers, and send market signals for greater climate-aligned investments.
Market instruments empower companies (and people) to vote with their wallets, creating global markets in the process. They enable decisions, transactions, financial flows, and verifiable claims for voluntary environmental action and reporting.
Companies—namely those partaking in the Science Based Targets initiative, RE100 initiative, and Clean Energy Buyers Alliance (CEBA)—also want clean energy and reduced emissions, which is why the volume of these transactions and system-wide investments keeps growing.
Companies procured roughly 1 billion EACs in 2021, creating at least $10 billion in additional revenue for clean energy and investment risk reduction. This volume keeps growing year after year, creating transaction flows that accelerate investments in power sector decarbonization. Moreover, companies purchased over 155 million carbon offsets in 2022, providing over $1 billion in additional revenue for offset projects, to neutralize harder to abate emissions.
The large and growing global customer base for both types of market instruments creates confidence among investors about the certainty of this additional revenue, leading to better and faster financing for project developers.
This helps clean energy and offset project developers secure financing to move their projects forward. For example, new research suggests that about 70% of new clean energy capacity in the U.S. resulted from corporate carbon-free electricity procurement facilitated by EACs because they provide a straightforward, cost-effective solution that scales.
The biggest problem today in corporate sustainability sits not with market instruments themselves, but rather that too few companies engage in environmental markets.
Using Disclosure Requirements to Incentivize Verifiable Corporate Environmental Action
The fabric of global voluntary and required frameworks for companies to report their greenhouse gas emissions and other environmental impacts motivates companies to take environmental actions. Market instruments, on the other hand, enable and verify completed environmental actions. The perfect pairing.
Market instruments facilitate verifiable claims by providing standardized data packages about a specific type of completed environmental action. Remove disclosure frameworks and the incentive for action dissipates; remove market instruments and verifiable claims become untenable.
Policymakers can also help companies pursue differentiated environmental procurement, impact, and claims. For example, capturing new attributes in quasi-governmental EAC tracking systems—such as sub-hourly timestamps, grid carbon intensity stamps, social and ecosystem impact labels, and labels for any clean energy generation and complementary resource (e.g., storage, including clean hydrogen, and efficiency)—will expand the menu of standardized “next generation” procurement options for corporate customers, like the Peace Renewable Energy Credit (P-REC).
Market Instruments or (Climate) Bust
Market instruments represent the common denominator for corporate environmental actions and verifiable claims. Global demand and resulting revenues from market instruments help address the climate finance gap.
Without market instruments, corporate environmental actions would become invisible, attribution impossible, and transactions stalled. Without market instruments, safeguards against the negative impacts of misaligned geopolitical and electoral outcomes on public environmental investments would disappear.
