The European wood pellet market is booming: concerns about climate change and renewable energy targets are predominant drivers. The aim of this analysis is to compare typical wood pellet chains from the purchase of the feedstock from sawmills to the conversion into heat or electricity. Cost structures, primary energy inputs and avoided greenhouse gas (GHG) emissions are reviewed. Three cases are defined: pellets for district heating (DH) in Sweden (replacing heavy fuel oil); bagged pellets for residential heating in Italy (natural gas); and Canadian pellets for electricity production in the Netherlands (coal). Supply may cost 110-170 per tonne of delivered pellets, with the main cost factors being feedstock collection, drying and long-distance ocean transportation (for Canadian pellets only). Largest avoided emissions are for power production (1937 kg CO2eq/tonne of pellets), followed by district heating (1483 kg). In relative terms, the GHG reduction varies from 81% for residential heating (with pre-dried feedstock) to 97% for DH. Based on a wood-pellet consumption of 8.2 million tonnes, the EU27 plus Norway and Switzerland avoided about 12.6 million tonnes of CO2 emissions in 2008. Concluding, wood pellets can achieve substantial GHG savings, especially when substituting coal for power production. However, wood pellets are relatively expensive, especially compared to coal. Only in the case of high oil prices, can the substitution of heating oil for DH be commercially viable. In most other cases, substitution is only possible with financial support from national governments, for example, feed-in tariffs or carbon taxes. The commercial markets for CO2 emission rights may cover some costs, but their impact is still limited. Copyright © 2010 Society of Chemical Industry and John Wiley & Sons, Ltd