Recently, wood pellets have become a reliable and clean renewable fuel for residential heating, replacing fossil fuels and reducing greenhouse gas emissions. Wood pellets are normally produced in industrial pellet plants (centralised production), but decentralised small-scale local production also occurs. This study applies Life Cycle Assessment (LCA) to quantify and compare the environmental profile of one centralised and two decentralised alternatives for wood pellet production for residential heating in Portugal: (1) industrial wood pellets production (centralised), (2) wood pellets production at sawmills (decentralised) and (3) wood pellets production at households (decentralised). System boundaries include the stages of forest management, wood pellet production, wood pellet distribution and wood pellet energetic conversion. The impact results show that industrial pellet production ranks as the worst alternative, while pellet production at households has the best environmental profile for all the impact categories under study. However, the environmental impacts of pellet production at the sawmill do not differ greatly from those of the pellet production at households; they are 14 to 16% higher for global warming and fossil resources scarcity and 0.3 to 3% higher for the remaining impact categories. The worst environmental performance of the industrial pellet production alternative is mainly due to high electricity and diesel consumption during wood pellet production and the use of logging residues to generate heat for drying biomass feedstock. A sensitivity analysis was performed to evaluate the influence of changing the distance travelled during the transport of packed pellets to stores and sawdust to households. The results show changes in the environmental performance ranking, highlighting that for short distances, both decentralised alternatives can be more sustainable from an environmental perspective than the centralised alternative, but for larger distances, the pellet production at households should be avoided.