This study examines how localized carbon reduction policies affect corporate green productivity. Leveraging a quasi-experiment from China’s low-carbon pilot rollout across cities, we find that these interventions significantly increased polluting firms’ green productivity. The gains persisted over time and were greater for firms with higher financial constraints, lower market competition, and lower capital intensity. Textual analysis reveals enhanced executive environmental cognition as a plausible channel. Overall, the results provide robust evidence that well-designed local regulations can achieve a win-win outcome of lower emissions and higher efficiency.