Global warming is one of the most important environmental issues today. One step for the European Union to fulfil the Kyoto protocol, stating a worldwide decrease of emissions of greenhouse gases, is to treat the environment as a scarce resource by attributing costs for environmental impact. This accompanied with considering the European electricity market as one common market, where coal condensing power is the marginal production, lead to the possibility to reduce CO2-emissions in Europe by reconstructing energy systems at a local scale in Sweden. A regional energy system model is used to study possibilities to replace electricity and fossil fuel used for heating with biomass and how a reconstruction can affect the emissions of CO2. An economic approach is used where cost-effective technical measures are analysed using present conditions and by including monetary values of externalities. The analysis shows that, by acting economically rational, a large amount of electricity and fossil fuel should, in three Out Of four cases, be replaced leading to a substantial reduction of CO2 emissions.