Energy efficiency is widely viewed as an important element of energy and environmental policy. Applying the TIMES model, this paper examines the impacts of additional efficiency improvement measures (as prescribed by the ACROPOLIS project) over the baseline, at the level of individual sectors level as well as in a combined implementation, on the German energy system in terms of energy savings, technological development, emissions and costs. Implementing efficiency measures in all sectors together, CO2 reduction is possible through substitution of conventional gas or oil boilers by condensing gas boilers especially in single family houses, shifting from petrol to diesel vehicles in private transport, increased use of electric vehicles, gas combined cycle power plants and CHP (combined heat and power production) etc. At a sectoral level, the residential sector offers double benefits of CO2 reduction and cost savings. In the transport sector, on the other hand, CO2 reduction is the most expensive, using bio-fuels and methanol to achieve the efficiency targets. An additional case is examined which assumes the CO2 emissions in the combined efficiency measures case as the target. This case concludes that, with different options, the same amount Of CO2 reduction is possible together with cost reductions over the baseline, confirming that the specific sectoral efficiency targets prescribed by ACROPOLIS may not be the optimal one to mitigate CO2. It applies the same efficiency improvement targets in the residential and industrial sectors but scales down the target in the service sector and avoids any further efficiency improvement in the transport sector. It replaces electricity with heating fuel in final energy consumption, while further increasing the use of gas for power generation in 2030. In 2050, part of the electricity demand is met through the import of electricity from renewable sources. (c) 2006 Elsevier Ltd. All rights reserved.