How can the digital economy reduce carbon emissions? Empirical evidence from China

China is transitioning into the digital economy era. The advancement of the digital economy could offer a fresh mechanism to attain carbon peak and carbon neutrality objectives. Applications of the digital economy, such as smart energy management, intelligent transport systems, and digital agricultural technologies, have significantly reduced carbon emissions by optimizing resource use, reducing energy waste, and improving production efficiency. This research does so by devising a theoretical model that looks into the multi-faceted power of the digital economy under a two-sector paradigm. Utilising a panel model, a mediation effect model and a spatial Durbin model to assess the digital economy’s power on carbon emissions. This research has determined that the digital economy can significantly diminish carbon emissions, with green tech innovations and industrial transformation being key contributors. The spatial spillover effect was used for the digital economy to aid in lowering carbon emissions in adjacent districts and upgrading better environmental stewardship. The influence of the digital economy has better performance in lowering carbon emissions in mid-western China than in the eastern area. This paper deepens understanding of the drivers of low-carbon growth and the significance, mechanism and regional disparities of the digital economy’s effect on reducing carbon emissions. It offers valuable policy insights and guidance for globally achieving digital economy growth, reducing carbon emissions and reaching carbon peak and neutrality goals.