On July 16, 2021, China launched its national carbon emission trading (CET) market, with initial participation limited to firms in the power sector. This study examines the stock market’s response to this policy change. Results show that power sector firms recorded stock returns approximately 2% to 4% lower than those of other firms in the immediate aftermath of the CET market’s introduction, with the difference being statistically significant at the 1% level. The effect is particularly pronounced for firms located in regions with limited energy transition capacity. Using a difference-in-differences (DID) framework, we also find that power sector firms experienced declines in profitability and increases in operating costs, providing a plausible explanation for the observed market reaction.