Increasing environmental risk nudges lending institutions to consider carbon risk while determining a borrower's cost of debt. Enhancing energy efficiency reduces carbon risk and, hence, the cost of debt. In this paper, we examine the impact of an Indian energy efficiency regulation, the Perform, Achieve and Trade (PAT) scheme, on firms' cost of debt. We employ difference-in-differences (DID) combined with a matching technique on firm-level data from 2006 to 2015. Our results suggest that the policy intervention lowered the cost of debt. Furthermore, we find that the PAT scheme resulted in increased ESG disclosure, reducing information asymmetry. Lower information asymmetry is a potential mechanism that leads to reduced debt costs. Our results are robust to alternative definitions of the cost of debt and empirical specifications.