This paper examines the impact of a market-based initiative, the carbon trading pilot on green bond financing cost in China. The results indicate that green bond financing cost is significantly lower in regions participating in the pilot program compared to those not included in the program. In addition, this effect is more pronounced in regions with better renewable energy (RE) development and a higher level of marketization. The mechanism analysis suggests that the pilot program promotes corporate green innovation, leading to a lower green bond financing cost. The results of this study support the beneficial effects of a market-based environmental policy and alleviate concerns among market participants.