This paper considers the effects of CO2 emission trading system on the substitution between coal and energy wood in the large scale heat and power production in Europe. We use a technology-based approach where the substitution between coal and wood takes place through switch from one technology to another over time. The analysis is conducted with the EUFASOM (European Forest and Agricultural Sector Optimization Model). Our results suggest that the CO2 emission trading system gives incentives for heat and power plants to increase energy wood demand in the limits of energy wood potential.