Many Governments support district heating projects because they are regarded as environmentally beneficial. However, often their social costs and benefits are not adequately assessed before support is granted. The purpose of this paper is to develop methods that can be useful to public authorities to prioritise among energy projects. We develop criteria for cost-benefit analyses-using district heating projects as a case study-emphasising both economic and environmental costs of the various energy alternatives. We discuss how the existence of an internationally integrated electricity market-in this case the market in the Nordic countries-affects the results. In an integrated market emissions may take place in countries other than where energy is used, a property that may have important consequences for social cost assessments. We conclude that one should assess environmental costs directly as far as possible, and that one should not include existing energy taxes or other taxes in calculation prices for energy projects. The same CO2 cost estimate should be used for all energy alternatives. Results from case studies indicate that the social cost (economic and environmental) of district heating may be lower than those associated with electrical heating, for meeting energy demand in new buildings.