The relations between building material competitiveness and economic instruments for mitigating climate change are explored in this bottom-up study. The effects of carbon and energy taxes on building material manufacturing cost and total building construction cost are modelled, analysing individual materials as well as comparing a wood-framed building to a reinforced concrete-framed building. The energy balances of producing construction materials made of wood, concrete, steel, and gypsum are described and quantified. For wood lumber, more usable energy is available as biomass residues than is consumed in the processing steps. The quantities of biofuels made available during the production of wood materials are calculated, and the cost differences between using these biofuels and using fossil fuels are shown under various tax regimes. The results indicate that higher energy and carbon taxation rates increase the economic competitiveness of wood construction materials. This is due to both the lower energy cost for material manufacture, and the increased economic value of biomass by-products used to replace fossil fuel. (C) 2006 Elsevier B.V. All rights reserved.