This paper describes a method for developing optimal bidding strategy based on a bilevel optimization, considering suppliers' emission of pollutants. The proposed methodology employs supply function equilibrium (SFE) model to represent the strategic behavior of each supplier. Locational marginal pricing mechanism is also assumed for settling the market and calculating the supplier profit. It is modeled as a bilevel optimization problem in which the upper-level subproblem maximizes individual supplier payoff and the lower-level subproblem solves the Independent System Operator's market clearing problem. In this paper, the multiobjective optimal power flow is used to solve market clearing mechanism with supplier emission of pollutants, as extra objectives, subject to the transmission limits and supplier physical constraints. To illustrate the proposed approach under different conditions an IEEE 30-bus test system together with a number of case studies are used. (C) 2008 Elsevier Ltd. All rights reserved.