The UK carbon floor and power plant hedging

How to calculate expected future carbon costs and optimal valuation and hedging decisions, by adjusting Monte Carlo simulations for the UK market

In April 2013, the UK government brought into force a tax on carbon emissions as a part of its Electricity Market Reform (EMR). The legislative target to promote decarbonisation is formulated as a carbon price floor (CPF), ie a minimum level of carbon cost to be achieved in the UK domestic market. In the 2014 Budget, it was announced that the carbon price support will be capped at £18 per tonne of carbon dioxide (tCO₂) until March 2020. This is lower than was planned initially, but is still a