||The objective of this work is to investigate the relation between firms’ economic and environmental performance with focus on CO2 emissions of Czech firms included in the 1st Phase of European Union Emissions Trading Scheme. I review the literature concerning the link between local pollutants that firms emit and firms’ revenues, costs and profits. Later, I discuss whether hypothesis verified on local pollutants are valid also for CO2. To reveal the impact of CO2 reduction on firms’ costs, I decompose CO2 emissions reduction into several effects, from which reduction of energy consumption is the most important. Special attention is given also to EU Emissions Trading Scheme that is specific to CO2 and determines the impact of CO2 reduction on revenues. In empirical models, I test the hypothesis derived in the theoretical part on the dataset of 125 Czech firms that covers firms’ CO2 emissions, their revenues, costs, profits and other characteristics. I find out that introduction of EU ETS did not encourage significant investments into CO2 emissions reduction. Uncertainty of development of carbon market after 2007 did not enable to predict potential future revenues from sold allowances and three years time horizon was too short for calculations of return on investments. Companies that invested into CO2 reduction despite these uncertainties experienced a negative impact on their financial performance. Drop in the price of allowances on the carbon market in 2006 caused that they received less revenues from saved allowances than they expected.