The carbon market policy is an effective means to promote green and low-carbon development, and is important for China to achieve the carbon peaking and carbon neutrality goals. We manually collated a list of non-pilot cities, neighbouring the regions implementing carbon market policies. With the panel data from 2006 to 2017, we examined the impact and mechanisms of the policy on non-pilot cities. The study found that the policy of the pilot city not only worked in its region but also promoted green and low-carbon development in the neighbouring non-pilot regions. This kind of external effect is self-reinforcing. Policy spillover effects and industrial relocation are important mechanisms for carbon market policies to exert externalities. However, the “pollution refuge hypothesis” holds if polluting industries dominate neighbouring areas. Further analysis shows that carbon market policies are more likely to have a point-to-surface effect in neighbouring cities if officials of the pilot city are at a critical stage. Such effect is strongest in Beijing, followed by Shanghai, while it is not effective in Hubei and Guangdong. Moreover, we found that carbon market policies were with synergistic effects in terms of carbon and pollution reduction. •Carbon market policies can drive low-carbon development in neighbouring non-pilot areas.•The effect can be enhanced by the perfection of carbon market policies.•The best performing region was Beijing, followed by Shanghai.•The policy spillover and relocation of enterprises are important mechanisms.•Only effective where the principal officer is in a critical promotion period.