Achieving the “dual carbon” goals and sustainable high-quality development, green transformation and low-carbon development are crucial. Against this backdrop, the construction of a sound ecological environment governance system and a robust green and low-carbon development mechanism is particularly urgent, with carbon trading policies being an important tool. At present, research on whether and how carbon trading policies, oriented towards carbon reduction, can more effectively achieve coordinated governance of green and low-carbon development is still relatively scarce. Based on data from 280 prefecture-level and above cities in China from 2006 to 2020, this paper utilizes the difference-in-differences method to explore whether and how the carbon trading policy can effectively drive green and low carbon transformation, from the perspective of multi-dimensional performances. The study finds that: (1) The carbon trading policy has a significant positive effect on energy saving performance, pollution reduction performance, and carbon reduction performance, and effectively drives green and low carbon transformation. (2) Mechanism analysis finds that carbon trading policy promotes urban green and low-carbon transformation by encouraging green technological innovation and improving the efficiency of energy use. (3) Based on the design of the carbon market system, the higher the carbon trading price, the stronger the carbon price stabilization mechanism, the higher the market liquidity, and the stronger the administrative penalties, the more obvious the positive effect of carbon trading policy on green and low carbon transformation. (4) Based on the policy implementation environment, fiscal decentralization promotes the green and low-carbon effects of carbon trading policy, while regions with high intensity of government intervention and environmental regulations weaken the driving effect of carbon trading policy to a certain extent. The high level of regional economic development, high level of digital finance, and low level of industrialization are all conducive to the policy effect. This paper enriches the research perspective of green and low-carbon transformation and provides useful references for the optimized design and effective operation of the carbon market. Compared with previous literature, the marginal contributions of this paper are as follows: (1) From the perspective of inputs and outputs, this paper constructs a green and low-carbon transformation assessment index that is more in line with the high-quality development of the economy and the construction of ecological civilization, and explores whether and how the carbon trading policy can achieve synergistic improvement of energy-saving performance, pollution-reduction performance, and carbon-reduction performance more effectively. (2) It analyzes the transmission channel of carbon trading policy to drive green and low-carbon transformation from the perspectives of source reduction effect and innovation effect. The empirical tests find that carbon trading policy helps urban green and low-carbon transformation by promoting substantive innovation and reducing energy intensity. (3) It systematically identifies the factors affecting the implementation of the policy from the aspects of internal system design and external implementation environment of the carbon market, so as to comprehensively clarify how the carbon trading policy can drive the urban green and low-carbon transformation more effectively. This study deepens the research on carbon trading to some extent, provides evidence for the effective operation of the carbon market and the comprehensive green and low-carbon transformation of the economy and society, and aims to explore effective pathways for promoting urban green and low-carbon transformation and provide references for improving the national carbon market.