This paper presents the exergetic analysis and optimization of a transcritical carbon dioxide based heat pump cycle for simultaneous heating and cooling applications. A computer model has been developed first to simulate the system at steady state for different operating conditions and then to evaluate the system performance based on COP as well as exergetic efficiency, including component wise irreversibility. The chosen system includes the secondary fluids to supply the heating and cooling services, and the analyses also comprise heat transfer and fluid flow effects in detail. The optimal COP and the exergetic efficiency were found to be functions of compressor speed, ambient temperature and secondary fluid temperature at the inlets to the evaporator and gas cooler and the compressor discharge pressure. An optimization study for the best allocation of the fixed total heat exchanger inventory between the evaporator and the gas cooler based on heat transfer area has been conducted. The exergy flow diagram (Grassmann diagram) shows that all the components except the internal heat exchanger contribute significantly to the irreversibilities, of the system. Unlike a conventional system, the expansion device contributes significantly to system irreversibility. Finally, suggestions for various improvement measures with resulting gains have been presented to attain superior system performance through reduced component irreversibilities. This study is expected to offer useful guidelines for system design and its optimisation and help toward energy conservation in heat pump systems based on transcritical CO2 cycles. (c) 2004 Elsevier Ltd. All rights reserved.