Can Carbon Markets Make It Cheaper for Green Companies to Borrow Money?

Takeaway: Joining an emissions trading scheme can lower a company’s borrowing costs, but only if the carbon market is active enough to give banks a reliable signal of the firm's environmental health.

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Key Points:

• Liquidity is Key: In active carbon markets with high trading volumes, joining China’s emissions trading scheme reduced corporate debt cost ratios by 0.8 to 1.3 percentage points.

• Inactive Markets Offer No Benefit: In thin, low-volume carbon markets—as well as during the inaugural year of China's national carbon market—the borrowing cost advantage disappeared completely.

• Credit Rating by Another Name: Lower borrowing costs occur because commercial banks view active carbon market participation as a credible stamp of environmental compliance, easing lender uncertainty rather than forcing radical operational overhauls.

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When governments mandate carbon cuts, business leaders typically worry about added overhead. Cap-and-trade programs force polluting firms to buy emissions permits, raising operating expenses. But could participating in a carbon market actually lower a firm's financial expenses elsewhere?

For businesses navigating the green transition, access to affordable credit is critical. Banks naturally dislike uncertainty. If a lender cannot verify how well a borrower is managing climate regulations or carbon risks, it charges a higher interest rate to offset that unknown risk.

This research demonstrates that emissions trading schemes do more than put a price on pollution—they can act as an informal credit certification. However, this financial dividend depends entirely on market design. If policymakers create a carbon market without enough trading activity, the financial benefits for compliant businesses evaporate.

Data Deep Dive

Economists Ruoshu He and Dongwei Su examined China’s regional pilot Emission Trading Schemes (ETS) launched between 2013 and 2020. China's experience offers a unique setup because its regional carbon markets varied widely in activity: markets in Guangdong and Hubei maintained frequent trading and clear prices, while pilots in cities like Tianjin and Chongqing saw very little permit trading.

The authors evaluated listed firms required to join these regional carbon markets, comparing their debt costs against similar non-regulated companies over time. They analyzed whether joining a carbon market reduced corporate debt expenses, how market trading volume influenced the outcome, and through what channel banks adjusted their lending terms.

Research

The study reveals that carbon markets do not affect borrowing costs equally. Instead, the outcome depends on market liquidity—how easily and frequently permits are bought and sold.

In high-volume, liquid carbon markets, entering the emissions trading system yielded an immediate, significant drop in corporate debt financing expenses (measured as financial expenses relative to total liabilities) by approximately 0.8 to 1.3 percentage points. This cost reduction persisted for three years post-enrollment. In low-volume markets, enrollment had no meaningful impact on borrowing costs at all.

Why does trading activity matter so much? The researchers tested several explanations and found the strongest evidence for an **institutional certification channel**. Banks face a information gap regarding a firm's long-term environmental liability. In active markets, regular permit prices and public compliance checks provide banks with reliable, government-backed proof that a firm is managing its regulatory obligations. With that uncertainty cleared, banks lower their risk premiums. In dead markets where permits are handed out administratively and rarely traded, joining the market provides no informative signal to lenders.

This credibility effect proved strongest for private companies (non-state-owned enterprises) and firms operating in regions with less developed financial infrastructure. Because these businesses usually face higher scrutiny from banks to begin with, the carbon market’s stamp of approval was far more valuable to them.

When the researchers examined China’s unified national carbon market, which launched in 2021 with low initial trading activity, borrowing costs did not drop for enrolled firms. This out-of-sample test reinforces their core takeaway: joining a carbon market alone is not enough; the market must be mature and active to unlock financing benefits.

Limitations to Keep in Mind

The study measures borrowing costs using a broad accounting ratio (financial expenses divided by total liabilities) rather than direct loan contract interest rates, meaning part of the recorded decline reflects changes in a firm's mix of short-term liabilities rather than lower interest rates alone. Additionally, because China’s financial system relies heavily on bank lending rather than corporate bond markets, these findings may apply differently in corporate debt markets in North America or Europe.

Why It Matters

For policymakers, this paper redefines how carbon markets should be evaluated. Market liquidity is not just a technical detail for energy traders—it is a mandatory foundation for unlocking corporate financing benefits. To help green-complying firms access cheaper capital, governments must design carbon markets that promote regular trading, clear price discovery, and transparent compliance reporting. Expanding coverage to new industries before a carbon market is mature may fail to deliver expected financial benefits to participating businesses.

Learn More

Paper Title: Emissions Trading Schemes, Market Liquidity, and Corporate Debt Financing Costs: Evidence from China

Authors: Ruoshu He and Dongwei Su

Institution: Working Paper

Publication Year: 2026 (Working Paper)

URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7029218

Econ Today Explains

Economic Concept: Information Asymmetry

Information asymmetry occurs when one party in an economic transaction holds more or better information than the other. In credit markets, a borrowing company knows far more about its internal management and regulatory risks than a lending bank does. Because banks cannot easily distinguish low-risk borrowers from high-risk ones, they often charge higher interest rates to all borrowers to shield themselves against unexpected defaults.

Market mechanisms that generate verified, public information—such as credit scores, independent audits, or active emissions trading records—reduce information asymmetry. By lowering the bank's cost of gathering reliable information, these mechanisms allow well-managed companies to secure cheaper debt financing.

This article was written by AI but reviewed by a real human.