With the development of market economy and the enhancement of environmental awareness, market-based environmental regulation will play an increasingly important role. Based on the panel data of 300 prefecture-level cities in China from 2008 to 2022, taking carbon emission trading policies as a quasi-natural experiment, the multi-time-point differential method was adopted to empirically study the impact of market-based environmental regulations on regional green innovation. It is found that the carbon emission trading policy significantly promotes urban green innovation, and this conclusion remains valid in the robustness test. Mechanism analysis shows that talent gathering, public awareness of environmental protection and government investment in science and technology play an important role in promoting green innovation. In addition, there is regional heterogeneity in the policy effect, which has a more significant promoting effect on green innovation in East China, Central China and non-central cities. The research conclusions of this paper have important implications for the government to strengthen the construction of carbon trading market, increase personnel training, enhance public awareness of environmental protection, and strengthen regional collaborative management, so as to promote the construction of a green and low-carbon society and the realization of sustainable development goals.