China has launched the national emissions trading system (ETS) and intends to form a novel mechanism to control provincial carbon emissions. While previous studies have examined ETS and provincial reduction targets separately, the impacts of the potential integration of these approaches on welfare and the spatial distribution of air quality-related health remain underexplored. In this study, we employ an integrated modeling framework to compare the economic impacts and health outcomes associated with PM2.5 and ozone under three provincial control mechanisms with the same target for national total carbon emissions in 2035. Our findings indicate that ETS improves national welfare by at least US$18.9 billion (0.12%) compared to the conventional provincial control mechanism (PRO_CAP). The partitioned carbon regulation mechanism (PART_REG), which applies the national ETS to power and energy-intensive industry sectors while assigning reduction targets to other sectors at the provincial level, achieves 85% of the welfare improvement observed under full ETS coverage (FULL_ETS). ETS redistributes CO2 and co-emitted air pollutant emissions from northern to southern China, improving air quality in northern provinces but worsening it in central and southern provinces. The national premature deaths increase by 32 700 (95% CI: 23 200–41 600) under PART_REG compared to PRO_CAP. When comparing the changes in welfare and monetized health damages, ETS remains cost-effective nationally, with a median net benefit of US$6.6 billion under PART_REG—20% higher than that under FULL_ETS. Northern and southeastern coastal provinces experience net positive benefits, while some central provinces face net negative impacts.

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