First off, let me welcome you to CncZone. There is a wealth of knowledge here available for the taking.
I have used rubber belting on my machine, but only for the gear reduction from the motors. I did not use belts for the full drive mechanism.
I did at one time use chain, which worked well. It doesn't stretch as much as you would think, as it is not under that much tension nor does it move at high speeds.
I wouldn't recommend using belts as your primary means of movement, reasons much like you have already found. I will say that the belts that I use for my gear reduction are at least a foot away from the plasma torch (and oxyfuel torch when I had it) at all times, and don't really see any heat or sparks.
I wound up using spur gear and rack as my main means of power transmission, but chain would serve you well too. I would stay away from ballscrews except perhaps on Z. The little travel and relatively slow speeds needed by Z would allow for ballscrews to be used there.
(Note: The opinions expressed in this post are my own and are not necessarily those of CNCzone and its management)
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