Global climate change and environmental pollution have become critical constraints on sustainable development. As an essential institutional arrangement reconciling economic growth with environmental protection, green finance (GF) has emerged as a core driver of the global green transition. Using China’s 2017 establishment of the Green Finance Reform and Innovation Pilot Zones as a quasi-natural experiment, this study constructs a panel of 273 Chinese cities from 2008 to 2023. It applies a difference-in-differences model and a spatial Durbin model to systematically assess the direct, indirect, and spatial spillover effects of the green finance policy (GFP) on urban pollution and carbon emission reduction (PCR).The results indicate that GFP significantly advances PCR, with stronger effects observed in eastern and western regions, old industrial bases, and resource-based cities. The mechanism analysis reveals that GFP promotes PCR by enhancing the quantity of green innovation, reducing energy consumption intensity, and promoting green energy efficiency, while industrial structure upgrading exerts a temporary masking effect. The spatial analysis further shows that while GFP significantly enhances local PCR, it exerts a negative spillover effect on neighboring cities, with the influence confined within 300 kilometers and gradually weakening with distance. This study uncovers the internal logic through which GFP facilitates pollution and carbon emission reduction at the city level, offering robust empirical evidence and providing practical policy implications for developing economies aiming to enhance GF systems and advance sustainable development.