Micro-combined heat and power (micro-CHP) systems have gained prominence in Europe and elsewhere, often attracting government incentives. Of the various micro-CHP technologies, Stirling engine (SE) systems are often preferred over internal combustion engines, but their economic and environmental sustainability is unclear. This paper uses life cycle assessment and life cycle costing to analyse SE micro-CHP units, comparing the results to conventional natural gas boilers and grid electricity. Assuming highly-efficient operation (77% thermal; 13% electrical efficiency) the SE system is preferable to conventional electricity and heat both economically and environmentally (for nine of 11 impacts). However, at more realistic efficiencies (71% thermal; 6% electrical), the SE system is uncompetitive (worse for seven environmental impacts, including global warming; 9% higher costs, despite subsidy). The choice of electricity, heat or combined output as a functional unit greatly affects the results. At low efficiencies, per unit of electricity, the SE system averages 44% worse than grid electricity. However, per unit of heat it averages 30% better than the gas boiler, but global warming potential (GWP) is 19% worse. For combined energy output, the SE system averages 3% better than conventional alternatives but GWP is 16% worse. Future improvements to the electricity grid mix would further minimise any relative benefits of the SE system, calling into question the suitability of subsidy.