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Firms are increasingly required to address carbon risk engendered by rising carbon emissions and climate change. This study examines how the capital market reacts to firms' carbon risk management in South Korea. By combining related research streams including the cost of capital, agency problem, signaling theory, and strategic environmental management, we present a hypothesis on the effects of carbon risk management in conjunction with government carbon policies on the cost of debt capital. The results of regression analysis and analysis of variance on 3,491 South Korean Exchange samples from 2010 through 2015 indicate that firms' carbon risk management decreases the cost of debt capital in the financial market. The findings of this study build a better theoretical and practical understanding of the outcomes of strategic choices to improve carbon risk management as well as the effects of government carbon emission reduction policies on a nationwide scale.