The paper examines the impact of CO2 reduction policies on the strategic planning of the energy sector. Attention is paid to the conflicts between economic and environmental goals influencing the penetration of renewable energy sources (RES). A linear programming (LP) model is applied to represent the structure of the Greek energy system. Energy flows are optimized with respect to the system＇s economic efficiency. The model incorporates a constraint concerning the CO2 emissions generated from the various energy production and consumption activities. The results show that a substantial reduction of CO2 emissions can be achieved through a large scale integration of RES into the energy system. Shadow prices identified by the model denote the real cost for the economy of using alternative energy forms under various environmental restrictions. They are useful to indicate the changes in the prevailing pricing mechanisms that are necessary to direct the market forces towards the desired policy goals.