The increasing production of waste polyethylene terephthalate (PET) is a growing problem worldwide. Environmentally benign conversion of waste PET to valuable materials remains a substantial challenge. In this paper, we developed a green route to reuse waste PET for low-cost synthesis of fluorescent carbon dots (CDs) via air oxidation followed by hydrothermal treatment in aqueous H2O2 solution. No expensive, corrosive, or toxic reagents, or severe conditions were required in the synthetic process. The resultant CDs possessed abundant oxygenous groups and unique photoluminescence (PL) properties, which showed a highly selective and sensitive detection of ferric ion (Fe3+) through a PL quenching effect (on-off). The fluorescence of CDs quenched by Fe3+ could be restored specifically with pyrophosphate anion (PPi), rendering the CDs/Fe3+ sensor promising for PPi detection (off-on). The linear ranges for Fe3+ and PPi detections were 0.5–400 and 2–600 μM, and the limit of detections (LODs) were 0.21 and 0.86 μM, respectively. The sensing system applied for Fe3+ and PPi assays in real water samples and human urine achieved good results. After detailed investigations, a possible electron transfer process was proposed for explaining the “on-off-on” sensing mechanism.