["Journal of Money, Credit and Banking, EarlyView. ", "\nAbstract\nWe show that carbon pricing and bank credit complement each other in reducing firms' carbon emission intensity. Our identification exploits a reform‐driven carbon price increase in the EU emission trading system (ETS) and administrative microdata, including the Italian credit registry. We find that highly exposed ETS firms increase term‐loan demand, relative to less exposed ETS firms. Such credit channel is associated with larger investment, but not with higher carbon emissions, reducing emission intensity. These effects are significant only among firms undertaking green investments. Moreover, higher credit demand by ETS firms crowds out credit supply to smaller firms in brown sectors."]