CO2 emissions from China accounted for 27 per cent of global emisions in 2019. More than one third of China's CO2 emissions come from the thermal electricity and heating sector. Unfortunately, this area has received limited academic attention. This research aims to find the key drivers of CO2 emissions in the thermal electricity and heating sector, as well as investigating how energy policies affect those drivers. We use data from 2007 to 2018 to decompose the drivers of CO2 emissions into four types, namely: energy structure; energy intensity; input-output structure; and the demand for electricity and heating. We find that the demand for electricity and heating is the main driver of the increase in CO2 emissions, and energy intensity has a slight effect on increasing carbon emissions. Improving the input-output structure can significantly help to reduce CO2 emissions, but optimising the energy structure only has a limited influence. This study complements the existing literature and finds that the continuous upgrading of power generation technology is less effective at reducing emissions and needs to be accompanied by the market reform of thermal power prices. Second, this study extends the research on CO2 emissions and enriches the application of the IO-SDA method. In terms of policy implications, we suggest that energy policies should be more flexible and adaptive to the varying socio-economic conditions in different cities and provinces in China. Accelerating the market-oriented reforms with regard to electricity pricing is also important if the benefits of technology upgrading and innovation are to be realised.