The study utilises both an energy sector approach and an economic approach. The effects of specific policy measures on the choice of fuels is evaluated with the POLA model, while the effects on the economy are studied with the VATTAGE model, based on the well-known MONASH-model (Dixon and Rimmer, 2002). We have studied two alternative scenarios, the first with a 7 per cent increase from current share of renewables, the other with an EU-wide 11.5 per cent flat rate increase. In the simulations, it is assumed that feed-in tariffs can be used to increase wind power generation as well as the use of wood fuels in energy generation. Furthermore, it is assumed that refining capacity exists to produce both transportation fuels and bio-oil from imported palm oil, to replace refined mineral oil products. It is also assumed that imported pellets can be used as a substitute for solid fossil fuels. Wood could be also used for producing transportation fuels but the processes are less effective than using wood directly as a solid fuel to substitute for fossil fuels. The study is organised as follows. Section two deals with the baseline, while the policies are analysed in section three. Section three concludes. Baseline and methodology 2.1 Methodology In this section, we study the dynamics of long-run emission targets. The study uses VATTAGE, a dynamic AGE-model based on the MONASH model (Dixon and Rimmer, 2002). The distinguishing features of the model concern its dynamics. Three inter-temporal links connect consecutive periods in the model: (1) accumulation of fixed capital, (2) accumulation of financial claims and (3) lagged adjustment mechanisms notably in the labour markets and in the balancing of the public sector budgets. Together, these mechanisms result in gradual adjustment to any policy shocks to the economy. In the model, capital is sector-specific and it therefore takes time for an industry to adjust to the increased energy costs caused by emission trading and increased energy taxes. In energy-intensive industries, the rise of energy costs lowers the rental on capital, which slows down investments until a new equilibrium is reached. In other industries, similar effects are caused by a rise in domestic energy taxes. Some of the industries, however, gain from the subsidies granted to renewable energy,