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Evaluating the effect of the carbon emissions trading scheme (ETS) on the decarbonization of the power sector is a basic task in the construction of China’s ETS. We use the energy flow relationship between the power and heat sectors to develop a more accurate accounting framework for CO2 emissions in the power sector and employ the difference-in-differences method to evaluate the impact of China’s ETS on CO2 emissions in the power sector and its dynamic effect. On this basis, we explore the mechanisms by which the ETS facilitates the decarbonization of the power sector, as well as its heterogeneous impacts. We find that the ETS has significantly promoted the decarbonization of the power sector, reducing its CO2 emissions in the pilot provinces by approximately 24.53 Mt compared to the non-pilot provinces. The decarbonization effect of the ETS was continuous and strengthened. In addition, the ETS promotes decarbonization of the power sector through technological advances in power generation and electricity utilization. Finally, the ETS’s decarbonization effect on the power sector is influenced by the heterogeneity of regions, carbon prices and quota allocation methods. Our findings have beneficial implications for the construction of carbon markets in the context of carbon neutralisation and carbon peaking. [ABSTRACT FROM AUTHOR]