The impact of the carbon trading pilot program on the financing cost of green bonds

• The carbon trading pilot program reduces green bonds’ financing cost. • This effect is stronger in regions with advanced renewable energy. • This effect is stronger in regions with a higher level of marketization. • The program promotes corporate green innovation, reducing green bond financing costs. We examine the impact of a market-based initiative, the carbon trading pilot program, on the financing cost of green bonds in China. The results indicate that the financing cost of green bonds is significantly lower in regions included in the carbon trading pilot program. This effect is more pronounced in regions with better renewable energy development and a higher level of marketisation. The mechanism analysis suggests that the pilot program promotes corporate green innovation, leading to a lower financing cost of green bonds. The results of this study highlight the beneficial effects of a market-based environmental policy that alleviates green concerns among market participants.