A systems approach was used to compare different heating systems from a consumer perspective. The whole energy system was considered from natural resources to the required energy services. District heating, electric heat pumps, electric boilers, natural-gas-, oil- or pellet-fired local boilers were considered when supplying heat to a detached house. The district heat production included wood-chip-fired and natural-gas-fired cogeneration plants. Electricity other than cogenerated electricity was produced in wood-chip-and natural-gas-fired stand-alone power plants. The analysis includes four tax scenarios, as well as the external cost of environmental and health damage arising from energy conversion emission based on the ExternE study of the European Commission. The most cost-efficient systems were the natural-gas and oil boiler systems, followed by the heat pump and district heating systems, when the external cost and taxes were excluded. When including the external Costs of CO2 emission, the wood-fuel-based systems were much more cost efficient than the fossil-fuel-based systems, also when CO2 capture and storage were applied. The external costs are, however, highly uncertain. Taxes steer towards lowering energy use and lowering CO2 emission if they are levied solely on all the fossil-fuel-related emission and fuel use in the systems. If consumer electricity and heat taxes are used, the taxes have an impact on the total cost, regardless of the fuel used, thereby benefiting fuel-based local heating systems. The heat pump systems were the least affected by taxes, due to their high energy efficiency. The electric boiler systems were the least cost-efficient systems, also when the external cost and taxes were included. (C) 2003 Elsevier Science Ltd. All rights reserved.