A power plant's financial value today is the discounted present
value of every future year's profit it is expected to earn before
retirement. Each year the plant pays a carbon price on every tonne of
CO₂ it emits; as that price rises, and as cheaper renewables erode its
margin, the plant's annual profit shrinks. The year profit first turns
negative is the year it becomes uneconomical to keep running — the
plant retires there, not at its originally planned end-of-life date.
profit(y) = baseline_margin × (1 − erosion×y)
− carbon_price(y) × emissions_per_year
shutdown_year = first y where profit(y) < 0
asset_value = Σ profit(y) / (1+discount_rate)^y, y = 1 … shutdown_year−1
- Trajectory steepness — how fast the carbon price rises. Flat/low keeps the price near today's level for decades; steep rise front-loads a fast climb.
- Discount rate — how much a dollar of profit ten years from now is worth today; higher rates shrink far-future profit faster.
- Actual shutdown vs planned retirement — under a steep trajectory the plant crosses to unprofitable and shuts down years or decades earlier than the lifetime originally assumed when its value was booked.
- Stranded value lost — the gap between what the plant was assumed to be worth (flat/low trajectory, full planned life) and what it is actually worth once a tougher trajectory cuts its life short: years of profit that were priced in but will never happen.
This is the stranded-asset mechanism: the risk isn't that the plant blows up or breaks — it's that the policy environment around it changes faster than expected, and a large share of its "book value" quietly evaporates.