Developing green lead markets

Lead markets, also known as early adopter markets, refer to specific geographic regions or industries where innovative products, services, or technologies are first introduced and gain meaningful traction. These markets often serve as indicators or predictors of future trends and developments in a particular field. Green lead markets pioneer products that are more sustainable and lower-carbon.

6.1. What are lead markets?

Lead markets are characterised by the presence of "lead users" or early adopters who have a strong need for and/or high prioritisation of innovative solutions. With this comes a certain willingness to take risks involved with being first or early movers, including potential “green premiums”. A green premium refers to the additional cost or price-premium associated with more environmentally friendly or sustainable products, technologies, or services compared to their conventional counterparts. It represents the difference in price between a sustainable option and a less sustainable alternative, arising from the fact that more sustainable products can involve higher production costs, research and development investments, and costs associated with adherence to stricter standards.

The opposite of a green premium is a ‘brown penalty’. This can occur, for example, when a functioning carbon price has internalised the environmental cost of products, making more climatically and environmentally harmful production processes and their outputs more expensive.

Lead markets are key in driving down the green premium, as they contribute to technological advancements being brought to market, economies of scale, and increased consumer demand, which in turn helps make sustainable options more accessible and cost-competitive.

A useful example of what lead markets can be is to think of Silicon Valley as a lead market for tech innovation, certain German regions as lead markets for the automotive industries or Denmark as a lead market for wind power technology development. Certain countries, regions or even cities can establish themselves as lead markets based on a concentration – existing or strategically developed, as elaborated upon below – of expertise, resources and infrastructure.

6.2. How can lead markets help realise lower-carbon buildings?

A fundamental first step of creating green lead markets is to identify what is ‘green’ and which products should be pulled to the market (see chapter 3). Once this has been done, there are a number of measures that can be taken, ranging from the municipal, regional or national level. These can include:

Green public procurement (GPP) requirements. Public buyers can leverage their purchasing power to drive demand for innovative products and technologies. By prioritizing the procurement of sustainable or cutting-edge solutions, public buyers can create a market pull for these products, stimulating their development and adoption.
Green purchasing agreements between public and private entities. As with to GPP, there are several large private buyers, who often collaborate with public authorities, that can leverage their purchasing power in a similar way. They can send clear signals to the market through statements of demand or green purchasing agreements.
Financial support. Governments can provide financial support to R&D and to scale-up existing solutions. This can be done through grants, subsidies, or tax incentives to encourage desired activities in targeted industries. Or low-interest loans, grants or venture capital funds to incentive startups. This reduces financial barriers to develop and scale up new solutions, helps stimulate innovation and enables companies to bring new products or technologies to the market.
Standards and regulations. The establishment of standards and regulations that promote sustainability or encourage innovation can shape the market environment and drive the development of lead markets. These standards can provide a level playing field and create incentives for companies to invest in research and development to meet the requirements.
Education and skill development. Investments in education, training, and skill development programs for big buyers (public and private) can cultivate a highly skilled tendering workforce that is up-to-date on emerging industries and capable of demanding innovation. Industry themselves also have a responsibility to facilitate collaboration and knowledge-sharing. Innovation clusters, incubators and technology parks represent valuable hubs for the exchange of ideas, resources, expertise that can spur on lead markets. Other exchanges could take the shape of regular “pitching sessions” where industries are invited by big buyers to share their innovations, or that industry hosts regular “tours” and site visits.

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Terms of Reference - Embodied Carbon