<p>The new energy demonstration city policy (NEDC) in China is a proactive response to air pollution and climate change. Assessing its impact on pollution mitigation and carbon reduction (PMCR) is crucial for addressing global energy challenges and promoting the energy transition. This study employs panel data from 148 prefecture-level cities in China spanning 2010 to 2021 to systematically investigate the diverse impacts of NEDC on urban PMCR using difference-in-differences, mediation effect, and spatial Durbin models. The results indicate that the implementation of the NEDC significantly promotes PMCR in cities. This effect is more pronounced in non-old industrial base cities, small- and medium-sized cities, and cities with low fiscal pressure, while it is insignificant in old industrial base cities, large cities, and cities with high fiscal pressure. Mechanism analysis reveals that the NEDC not only stimulates enterprises to engage in green technology research and development, enhancing the city’s green innovation capability, but also facilitates the free flow of energy factors in the market, thereby improving energy use efficiency and further advancing PMCR. Additionally, the PMCR effects of the NEDC exhibit spatial spillover characteristics, as the policy reduces sulfur dioxide emissions in neighboring regions but increases carbon dioxide emissions in those areas. These findings provide robust empirical evidence for understanding the environmental co-benefits of energy transition policies, offering valuable insights for policymakers to optimize sustainable energy strategies in developing economies.</p>