Increased integration and co-operation within the Southern African power sector has opened up significant opportunities for reducing the economic and environmental costs of meeting increasing electricity demand in Southern Africa. This paper applies a linear programming model to investigate the economic and environmental benefits of regional integrated planning for electricity, and the impact of including environmental costs in the decision-making process. We find that, from a financial perspective, optimising generation and transmission investments in the region would result in savings of $2-4 billion over 20 years, or 5% of total system costs. Introducing a tax based on the external damage costs of carbon dioxide as part of the decision-making process would result in moderate increases in financial costs (15-20%), but would reduce regional carbon emissions by up to 55% at a mitigation cost of $11 per tonne of carbon dioxide. This raises the possibility of financing regional power projects with Clean Development Mechanism funding, which we explore with an example. (c) 2004 Elsevier Ltd. All rights reserved.