This paper studies the operation of an electric grid with renewable wind generation and plug-in electric. vehicles (PEVs). In particular, PEVs will be the controllable demand that can mitigate the intermittency in wind generation and improve the capacity factors of the non-renewable generation assets on the grid. Optimization problems are formulated to minimize the costs of electricity generation, and two approaches are proposed to address the grid CO2 emission in the optimization. The first approach directly penalizes CO2 in the objective function, and the second approach adopts a carbon disincentive policy to alter the dispatch order of power plants, so that expensive low-CO2 plants can replace cheap high-CO2 plants. These two approaches result in very different outcomes: the first approach affects only the PEV charging demand on the grid and does not result in significant CO2 reduction, whereas the second approach controls both the generation and load, and CO2 can be reduced substantially. In addition, the carbon disincentive policy, unlike a carbon tax, does not collect any revenue; therefore, the increase in electricity cost is minimal. The effect of the proposed algorithms on the grid electricity cost and carbon emission is analyzed in details and reported. (C) 2013 Elsevier Ltd. All rights reserved.