<p>The carbon emissions trading pilot policy has emerged as one of the most important institutional innovations in environmental decoupling and has had a substantial effect on energy eco-efficiency in China. This study uses panel data from 257 cities from 2007 to 2020 to analyse the influence of environmental decentralization policy on energy efficiency. To evaluate the ecological efficiency of energy, the authors use a super efficiency SBM model. The entropy method is used to construct an index that addresses environmental decentralization. A difference-in-differences (DID) model containing interaction terms is employed to determine the direct and indirect effects of environmental decentralization on energy efficiency. Additionally, we employ fixed effects and mediation effect models. The findings suggest that the decentralization brought about by the carbon emissions trading pilot policy remains an obstacle to the progress of energy efficiency. The mechanistic analysis indicate that adverse effects occur mainly through channels of technological upgrading and industrial restructuring. Furthermore, the threshold regression results reveal that the adverse effects of environmental decentralization are exacerbated after industrial upgrading surpasses a threshold. The local negative effects are undeniably important, but many positive secondary and spillover effects of environmental decentralization positively impact energy efficiency, especially in relation to carbon trading. To achieve economic development and ecological efficiency, this research proposes measures such as strengthening a multilevel environmental governance system, improving policy coherence, advancing clean energy technologies and a sophisticated industrial structure and strengthening the interregional cooperation mechanism.</p>