Can market-based environmental regulation drive a green breakthrough in industrial transfer hubs? Evidence from China’s Carbon Emission Trading Scheme

China’s industrial gradient transfer has led to the concentration of many high-polluting enterprises in recipient regions, raising great concerns about the formation of pollution havens. This paper examines whether a market-based carbon price regulation, the Carbon Emission Trading Scheme (CETS), can drive a green breakthrough in an industrial transfer hub that is threatened with becoming a pollution haven. The Huazhong Region, one of China’s major industrial recipient regions, is used for empirical analysis. Specifically, using a difference-in-differences (DID) method with sector-level data from 2010 to 2020 and treating CETS implemented in Hubei province as a quasi-natural experiment, we investigate the causal relationship between CETS and industrial green transformation in the Huazhong region. Our findings show that this effect is significantly positive and gradually strengthens during 2010–2019. This policy’s positive impact is more powerful on heavy and high-energy-intensive sectors. Mechanism analysis reveals that CETS drives this transformation by promoting energy decoupling, enhancing operational capabilities. However, this policy restricts the enhancement of green technological strength that significantly promotes green transformation. Our research provides robust evidence that a well-designed market-based environmental regulation can counteract the pollution haven effect. It suggests that CETS can serve as a powerful tool to guide industrial recipient regions to achieve green breakthroughs, offering critical insights for coordinating regional development and environmental governance.