Improving the level of green innovation is indispensable for sustainable urban development. This article uses China’s city-level data from 2000 to 2018 as a sample to test the impact and mechanism of local government competition on urban green innovation. We find that local government competition on environment has an evidently positive impact on green innovation, and there is a significant spatial spillover effect. Further channel inspection results show that local government competition affects green innovation through the establishment of development zones. Our research will help improve the level of urban green innovation and provide a theoretical reference for local governments’ policy-making. Besides, our results show that the mechanism of building development zones through which local environmental competition affects green innovation is more effective in eastern China.