<p>This study investigates whether carbon trading improves air quality by using high-frequency daily data from China’s seven pilot carbon markets and real-time air pollution readings from 206 surrounding monitoring stations. We construct alternative indicators of carbon market liquidity and assess their effects on the Air Quality Index (AQI) using a fixed effects model. The findings show that poor liquidity—reflected by higher illiquidity ratios—is significantly associated with higher AQI values, suggesting that illiquid markets weaken incentives for carbon emission reductions and air quality benefits. Spatial heterogeneity suggests that pilot carbon markets with more efficient allocation generate greater air quality benefits. Temporal heterogeneity indicates that the effect is most pronounced in summer, moderate in winter and spring, and weakest in autumn. Furthermore, the observed improvement in air quality is primarily attributable to reductions in PM2.5. This study offers new evidence on the short-term environmental impacts of carbon trading and provide actionable insights for improving market design and regional policy alignment.</p>