After great improvements in energy efficiency in the 1970’s, Japan has made little progress in reducing energy consumption since 1990, the base year for the Kyoto Protocol. This study is motivated by the recent growing demands among policy makers to find all possibilities for saving energy. To make informed decisions on how to save energy, policy makers need detailed information on energy consumption structures within each jurisdiction. First, in this article, I decompose national level energy intensity into efficiency and activity effects with the Fisher Ideal index, and then estimate regressions on prefecture level residential electricity demand between 1990 and 2003. It is found that national level energy intensity declined by seventy three percent from 1970 to 2003; sixty three percent of the decline may be attributed to improvement in energy efficiency. Energy intensity, however, has slightly increased since early 1990’s. Secondly, this paper explores the impact of reduction of carbon emission on the economy. I find that the Japanese government needs to enact the environmental taxes on a $12/ton in order to meet the Kyoto Protocol. It is also found that imposing a $12/ton environmental tax reduces Japanese GDP by around six percent and equivalent variations in urban regions fall while equivalent variations in rural regions rise.