The non-lethal 40mm sponge grenade, the M1006, is like a big rubber bullet, but with an added extra: it can mark the target with indelible visible dye, or with dye that only shows in UV light. It provides a handy way of tracking down people previously involved in a disturbance. But in a sense it only goes half-way: for a really effective marking grenade you have to go back to the NWC TIARA grenade developed during the Vietnam War.
TIARA -- Target Illumination and Recovery Aid -- was a formulation developed by Dupont in association with the Navy as a way of providing illumination for a variety of purposes. the active ingredient was a compound known as PB-155; when exposed to air it oxidizes rapidly but at low temperature, emitting a brilliant blue-green light.
It was used for marking airstrips and providing emergency lighting, as well as a variety of signalling functions. Different versions glowed for a duration ranging from seconds to hours, and it was supplied in spray cans or some exotic munitions.
One use was the Night Canopy Marker grenade issued to special forces. The grenade was intended to be thrown or fired into the jungle canopy, where it spread TIARA pver the leaves and provided a glowing marker for aircraft. but as Kevin Dockery recounts in his book, Special Warfare Special Weapons, SEALs soon found other uses for the grenade:
I don't know what happened to PB-155 -- perhaps it turned out to be slightly less 'non-toxic' than originally thought (maybe one of our readers knows?). But a safe modern equivalent might turn out to have many uses.