This paper discusses a methodology for detailed modelling of electricity generation of large interconnected power systems in a liberalised market. The resulting model, called E-Simulate, respects the technological restrictions and boundary conditions inherent to power generation and simulates the power generation and cross border trade on an hourly basis and on a power plant level. Nevertheless, E-Simulate is sufficiently flexible, transparent and fast. It is a valid, objective and useful tool in the simulation of the impact of power generation topics in the context of liberalised markets and GHG emission reduction. As a comprehensive example of the use and the strength of E-Siniulate, we study the effect of a CO2 tax on power generation and electricity trade in and between eight interconnected European zones: The Netherlands, Belgium/Luxemburg, France, Germany, Spain, Portugal, Switzerland and Italy. A CO2 tax of 10 EURO/ton CO2 causes an overall CO2 emission reduction of about 61K. We notice an overall increase in gas fired generation and a corresponding reduction of coal and lignite fired generation on a trans-national level. In some zones (The Netherlands, Belgium/Luxemburg and Italy), the emissions will rise. In others (France, Germany and Spain), emissions will decrease. This is a result of the CO2 tax that not only causes a shift towards fuels with lower carbon content but also, and correspondingly, leads to a redistribution of cross border trade. (c) 2005 Elsevier Ltd. All rights reserved.