We developed an economic model and an energy model, and used them to analyze the effects of information technology (IT) investment on energy consumption and CO2 emissions in the US and Japan. The analysis involved mainly calculations for two cases: business as usual and stimulated IT investment. We also tested the oft-posited possibility that advancing IT investment in the US is already lowering that country's energy intensity (energy/GDP). Our analyses determined that: (1) increasing IT lowers energy (CO2) intensity, and (2) an increase or decrease in overall energy consumption depends on which trend is stronger: the income effect caused by economic vitalization from increased IT use (increasing energy consumption) or the substitution effect by change in the industrial structure as seen in the shift away from smokestack industries (decreasing energy consumption). According to our calculations, Japan would conserve more energy by promoting IT than not. On the other hand, because the substitution effect is already advanced in the US, further increasing IT use in the future will have a large income effect, and increase energy use. (C) 2003 Elsevier Ltd. All rights reserved.