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Carbon emission trading policy (CETP) is an important tool for energy savings and emission reduction. However, the effect of CETP on carbon emission reduction in power industry is still unknown. This paper uses the difference-in-differences (DID) model and the intermediary effect model to test the impact and mechanism of CETP on power industry carbon emissions. In addition, a spatial difference-in-differences (SDID) model is established to analyze the spatial spillover effect. The results show that CETP has a significant inhibitory effect on power industry carbon emissions and the results are still valid after endogenous and robust tests. The improvement of technology level and power conversion efficiency plays an intermediary role for CETP to reduce power industry carbon emissions. The optimization of power generation structure is likely to become another important way for CETP to play its role in the future. The spatial spillover effect test shows that CETP not only has a significant inhibitory effect on power industry carbon emissions in the pilot areas but also has a negative spatial spillover effect on power industry carbon emissions in the surrounding non-pilot areas. The heterogeneity tests show that CETP has the most significant reduction effect in the central region of China and the strongest spatial spillover inhibiting effect in the eastern region. The purpose of this study is to provide decision-making references for government to achieve China's dual-carbon goal., (© 2023. The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature.)