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The rapid development of China's economy has also led to serious environmental problems, which have seriously restricted China's sustainable development. To this end, the Chinese government has continued to explore environmental governance. So, can environmental governance policies promote industrial green transformation, so as to achieve the goal of sustainable development? Will environmental policy competition among local governments have an impact on them? These issues are the focus of this article. Based on the provincial panel data of China from 2006 to 2021, this article empirically analyzes the relationship between environmental governance, local government competition, and industrial green transformation. The results found that there was a "U" type nonlinear relationship between environmental governance and industrial green transformation. On the whole, most regions of China are still in the development stage where environmental governance is not conducive to industrial green transformation. There is competition for environmental governance policies among local governments in China, and the characteristics of "race to the bottom" are more significant. In the East developed areas, there is a more significant "yardstick competition" game state. In the Midwest undeveloped areas, it is manifested as competition for resources by deregulation of the environment, thereby promoting short‐term economic growth. In addition, local protection behaviors negatively regulate the impact of environmental governance on industrial green transformation, that is, inhibiting local industrial green transformation by causing labor market mismatch. This study can provide valuable insights for policymakers aiming to adopt measures to achieve the sustainable development of the economy and environment. [ABSTRACT FROM AUTHOR]