The integration of biorefinery processes into existing pulp and paper mills has been identified as a promising avenue to maintain mills activities. It could increase and diversify revenues, keep the forestry-based communities alive, and potentially mitigate climate change by replacing fossil-based fuels or products. The life cycle assessment (LCA) methodology is increasingly used to verify this last claim and assess other potential environmental impacts of biofuels. However, LCA studies are usually not performed at the process design stage, when it would be more efficient to identify and control environmental aspects. Moreover, the long-term economic profitability of biofuels depends on future energy and climate policies, which are usually not considered in techno-economic feasibility studies. This paper proposes a holistic approach, combining the LCA method and an energy system model (NATEM-Canada), to offer a novel simultaneous assessment of potential environmental impacts and market penetration under different energy and climate policy scenarios for butanol produced from pre-hydrolysate in a Canadian Kraft dissolving pulp mill. This novel combination of assessment methods is replicable to assess other types of emerging energy pathways, and to help designing more sustainable forest biorefinery processes in other countries with important forest sector. Results show that 1) the energy efficiency of the butanol production process is a critical aspect to consider in future design and implementation steps in order to make butanol a competitive fuel among all other alternative fuels, 2) with a 50% internal heat recovery, butanol has a role to play in the transportation sector under climate policy scenarios, and has a lower carbon footprint than gasoline and corn butanol as estimated by a 2010 US EPA study, and 3) higher supply costs for feedstock might undermine the competitiveness of butanol on the medium term (2030), but probably not on the long-term (2050).