<p>Amidst the drive towards green development and low-carbon transition, the ramifications of stringent environmental regulations on employment have increasingly captured public interest. We utilized data collected from 273 cities in China and adopted Difference-in-Differences (DID) and mediation model to explore carbon trading’s impacts on employment levels and its underlying mechanisms. The results suggest that the practice of carbon trading significantly enhances overall employment levels. The study finds that policy can exert output effects, which can promote technological innovation, and thus increase employment levels. The policy also has a factor substitution effect, which will promote investment in environmental protection, and thus improves the level of employment. Furthermore, we also examined seven major industries and discovered that carbon trading significantly elevates employment levels in the manufacturing, wholesale and retail, and information transmission, computer services, and software industries. However, it exerts a suppressive effect on employment in the electricity, heat, gas, and water production and supply industries. The positive effect of carbon trading on employment levels exhibits notable heterogeneity across different cities. It is more pronounced in cities with lower carbon emission intensity and higher coal dependency. Our research integrates carbon trading and employment considerations within a unified analytical framework. It will provide valuable references for achieving carbon neutrality goals and actively fostering employment.</p>