Digital environmental innovationn (DEI) emphasizes the integration of digital technology into environmental innovation processes that can drive sustainable development in the era of the digital economy. In China, innovative city construction (ICC) aims to foster innovation through place-based policies. This study examines how ICC impacts DEI under the framework of local government yardstick competition. Based on a new specific measure of DEI and panel data from 292 cities in China from 2004 to 2020, this study investigated the impact and its underlying mechanism using the staggered difference-in-difference method. We find compelling evidence that ICC significantly augments DEI. Specifically, DEI would be up to 40% lower if the city did not have this special status. Mechanistic analysis proves that ICC enhances DEI through three channels: alleviating the distortion of land allocation, strengthening digital agglomeration, and enhancing government financial support for science and technology. Heterogeneity analysis indicates that ICC has a larger impact on DEI in cities with greater local autonomy, higher levels of marketization, and stricter environmental regulation. In addition, ICC promotes DEI in neighboring regions, generating a significant "spillover effect." Finally, ICC can effectively reduce environmental pollution through DEI.