This paper presents a novel, two-phase approach for optimal generation scheduling, taking into account the environmental issue of emission allowance trading in addition to the economic issue of operation cost. In the first phase, hourly-optimal scheduling is done to simultaneously minimize operation cost, emission, and transmission loss, while satisfying constraints such as power balance, spinning reserve and power generation limits. In the second phase, the minimum up/down time and ramp up/down rate constraints are considered, and a set of 24-h optimal schedules is obtained using the outputs of the first phase. Simulation results indicate effectiveness of the proposed approach.