Empirical evidence demonstrates that market-driven carbon trading scheme (ETS) is a crucial instrument for China to control environmental pollution. Based on the panel data of China’s 283 prefecture-level cities from 2006 to 2017, this research investigated the transmission mechanism, direct and indirect effects of ETS on carbon emission intensity (CEI) using difference-in-differences (DID) model, propensity-score-matched difference-in-differences (PSM-DID) model at national, regional, and local levels (cities with different industrial characteristics). The results demonstrated the mediating effects of total energy consumption, energy consumption structure, and industrial structure upgrading in the incentive role of ETS on CEI reduction. Moreover, ETS directly and effectively reduced CEI at the national level, while the spatial heterogenous effects were identified at regional and local levels, which emphasises the necessity and importance of unified carbon trading market establishment and classified governance.