Pollution emission reduction is becoming an inevitable global goal. Incorporating pollution reduction goals into power system operation affects several different aspects, such as unit scheduling and system reliability. At the same time, changes in the energy scheduling change the required optimal reserve amount. Optimal spinning reserve scheduling also affects the energy market scheduling. Optimal reserve allocation changes the energy scheduling, which affect the amount of pollution emission. Therefore, incorporating pollution emission reduction and optimal spinning reserve scheduling cannot be studied separately. Analysis of the system effects of pollution reduction should be performed considering the ancillary service market, specificity the optimal spinning reserve scheduling. This problem is addressed in this paper by incorporating optimal spinning reserve scheduling in a combined environment economic dispatch (CEED) in one objective function. The framework of this paper enables the study of the effect of optimal reserve scheduling and emission reduction as well as an analysis of the system effects of pollution reduction. With the increased AMI and smart grid realization, the reserve supplying demand response (RSDR) is becoming an important player in the reserve market, and thus, these resources are also taken into account. In this paper, the objective function is social cost minimization, including the costs associated with energy provision, reserve procurement, expected interruptions and environmental pollution. A MIP-based optimization method is developed, which reduces the computational burden considerably while maintaining the ability to reach to the optimal solution. The IEEE RTS 1996 is used as a test case for numerical simulations, and the results are presented. The numerical results show that optimal reserve scheduling and RSDR utilization resources have a considerable impact on environmental-economic cost characteristics. (C) 2011 Elsevier Ltd All rights reserved.