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Economic models are needed to analyze the impact of policies adopted for controlling carbon emissions and increasing distributed renewable generation in microgrids (green penetration). The impacts are manifested in performance measures like emissions, electricity prices, and electricity consumption. This paper presents an economic model comprising bi-level optimization and Pareto analysis. In the bi-level framework, the upper level models the operation of the microgrids and the lower level deals with electricity dispatch in the grid. The economic model is applied on a sample network in two steps. In step1, the bi-level model yields operational strategies for the microgrids and the corresponding values of the grid performance measures. In step2, a statistical analysis of variance combined with Pareto optimization attains guidelines for setting policies for emissions reduction and green penetration without …