<p>We examine whether China’s Carbon Emission Trading Scheme pilot affects corporate debt financing costs. Using a difference-in-differences design and a sample of Chinese A-share listed firms from 2008 to 2020, we find that the CETS pilot significantly increases debt financing costs for treated firms. This result withstands a battery of robustness tests. Mechanism analysis reveals that CETS elevates debt financing costs by increasing operational risk and reducing information quality. Heterogeneity analysis further demonstrates that the positive effect is more pronounced among non-state-owned enterprises, financially constrained firms, firms with limited carbon cost transfer capacity, firms operating in carbon markets with higher prices and trading volumes, and those with weaker green innovation capability. We also find that CETS reduces the availability of bank credit for pilot firms. Our findings contribute to the literature by extending research on the economic consequences of carbon trading in emerging markets, shifting attention from environmental outcomes to financial consequences, and identifying market-based environmental regulation as an important determinant of corporate debt financing costs.</p>