This study explores the recycling challenges of industrial sludge, owing to its non-recyclable properties and associated environmental problems. To promote sustainable energy utilization, a novel approach combining hydrothermal carbonization and co-gasification was employed to facilitate the conversion from waste to energy. The industrial sludge was pretreated in the batch-type hydrothermal treatment unit at 180–220 °C, followed by co-gasification. The experimental results indicate that pretreating the sludge at the hydrothermal temperature of 200 °C maximized its thermal decomposition, leading to a rougher structure with obvious cracks, eventually transforming into numerous fragmented small particles. At 1100 °C with a blending mass ratio of 1:1, the sludge hydrochar at 200 °C significantly enhanced the reactivity of coal char, exhibiting the gasification reactivity index R0.9 of 1.57 times higher than that of untreated char. Using the in-situ technique with the heating stage microscope, it was first observed that the addition of pretreated sludge coal chars underwent gasification in the shrinking core mode, displaying a significant ash melt flow phenomenon. Based on the in-situ X-ray diffraction, it was discovered that more amorphous structures were formed by the reaction of Fe with other minerals in the sludge-coal blended char after hydrothermal carbonization at 200 °C. With pretreatment at the hydrothermal temperature of 200 °C, the sludge can increase the specific surface area of the blended char and facilitate the cracking of carbon crystals during co-gasification. Its specific surface area and the Raman spectroscopic ratio ID1/IG were 1.76 and 1.17 times that of coal char, respectively. Collectively, this study highlights the potential for energy recovery from industrial sludge, contributing to sustainable waste management in the chemical industry.