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What Are Carbon Taxes
7/30/2025
By: Aliza Khan
In the past few years, you may have heard of or briefly read about the carbon tax in a number of different contexts and conversations. You may only be familiar with the tax through the Conservative Party of Canada’s “Axe the Tax” slogan or through the quarterly carbon rebate you received as part of your tax returns. However, as an attempt at mitigation policy, the carbon tax deserves a deeper and more nuanced understanding.
The carbon tax in Canada can be better understood as a carbon pricing system. Essentially, this system places an additional charge on services, items, and industries that contribute to greenhouse gas pollution, mainly occurring through the burning of fossil fuels (Environment and Climate Change Canada 2025a). In mitigating climate change, reducing greenhouse gas emissions is necessary as they are the main reason for trapped heat in our atmosphere which is causing unprecedented and dangerous levels of change to our climate (Environment and Climate Change Canada 2025a). Thus, the main goal of the carbon price is to provide a financial incentive for industries and companies to shift towards offering products and services that are more climate-friendly, thereby reducing overall greenhouse gas emissions.
In a Canadian context, the carbon pricing system that was initially introduced under Justin Trudeau’s term as Prime Minister can be understood in two parts: the fuel price and the large industries price (David Suzuki Foundation 2025). In both of these systems, there is a federal benchmark for provinces and territories to abide by. Provinces and territories can choose to implement their own carbon pricing systems in alignment with the federal benchmark—in a case where a province or territory does not propose its own system, a federal system is implemented (Environment and Climate Change Canada 2025a).
The carbon price on fuel, more commonly known as the consumer tax, refers to the increased costs of fossil fuel purchases, mainly those associated with gasoline and diesel (Environment and Climate Change Canada 2025a). The pricing system imposed a regular rise in order to give consumers appropriate time to adjust to the pricing shifts. Eventually, this pricing system aimed to bring the price of fossil fuel purchases to $170 per tonne in 2030 (David Suzuki Foundation 2025). This may seem like a huge increase, but to put it into perspective: measured increase in price per liter of gasoline in April 2024 was three cents (David Suzuki Foundation 2025). For all provinces and territories, outside of Nunavut and Yukon where money is returned to the territorial governments, money is returned to individuals via the Canada Carbon Rebate (Environment and Climate Change Canada 2025a).
On the other hand, large industrial emitters follow a separate system for their carbon pricing. This is more commonly referred to as the Output-Based Pricing System (OBPS). Through this system, sectors and activities that qualify are assessed under set regulatory standards (Environment and Climate Change Canada 2025b). There are three main aspects to the carbon pricing system for large industrial emitters:
Under the OBPS, proceeds are similarly returned to Nunavut and Yukon to their respective governments while all other provinces and territories receive it in another way. In particular, the proceeds get returned to regions via the OBPS Proceeds Funds in an effort to support local economies’ emissions reductions as they shift to sustainable solutions (Environment and Climate Change Canada 2025a). The fund provides assistance to initiatives and projects through two streams: the Decarbonization Incentive Program and the Future Electricity Fund (Environment and Climate Change Canada 2025b).
While it is important to understand what exactly carbon pricing is, it is equally as important to understand if this policy has led to a meaningful impact.
The David Suzuki Foundation (2025) highlighted that Sweden’s own carbon pricing system, in effect since 1991 and working in combination with other policies, has cut emissions by an estimated additional 20%. Furthermore, the carbon pricing system in British Colombia, which has been in effect since 2008, has cut an estimated 5-10% of emissions with a projected increase in effectiveness as the system continues to increase prices. Thus, it is evident that the carbon pricing system can reduce carbon emissions domestically.
Yet, if the carbon pricing system has displayed effective change, why has it faced so much scrutiny? As with many policy decisions, the carbon price has some drawbacks.
Firstly, many view the consumer price on fossil fuel purchases as needlessly negatively impacting individuals. While revenue from the carbon pricing system is redistributed to individuals, the distribution may not support all individuals equally (Barnard 2025). For example, while most receive more than they have spent from the carbon pricing system via their quarterly carbon rebate, this is not the case with families who live in rural or remote areas. Due to the higher costs for transportation and heating, some families feel disadvantaged that the total increased cost they have to pay for necessary services is higher than their return via the carbon rebate (Barnard 2025). This consumer price is also regarded as much less effective than the large industry pricing system—in fact, the latter accounted for around 80% of the overall reduction in emissions from the carbon pricing system (Murray 2025).
Furthermore, the impacts of the carbon pricing system ultimately fall short if it isn’t combined with the implementation of a carbon border adjustment mechanism (CBAM). The carbon tax outlined above only applies to Canadian manufacturers, so the additional cost for producing or purchasing items that burn fossil fuel eventually gets pushed down from Canadian manufacturers to Canadian consumers. For a world as interconnected as ours, it is inevitable that products that are globally manufactured are also present in our stores—including products from countries that do not implement carbon pricing systems. Consequently, products that may not have been produced in the most climate friendly manner are priced lower (Wolfram 2023). Not only does the domestic carbon pricing system give an advantage to the foreign imported goods while putting domestic producers in a disadvantaged position, but they also push consumers to purchase goods that have a higher emissions rate (Wolfram 2023). This is where the CBAM—which Canada has not implemented—is especially useful! The CBAM places additional costs on imported goods, with the price varying depending on the emissions rate of the goods throughout production. Thus, CBAMs are able to level the playing field for domestic manufacturers while still providing consumers with more climate friendly options (Wolfram 2023). However, as is the case in Canada, a carbon pricing system that only regulates domestic greenhouse gas emissions ultimately falls short of the full potential behind carbon prices.
The carbon pricing system in Canada was implemented under Justin Trudeau’s term but faced a lot of pushback from individuals and political parties. Accordingly, the change in leadership from Justin Trudeau to Mark Carney has been marked with significant changes in policy, including those made to the carbon pricing system (Murray 2025). Namely, Carney has repealed the fuel charge and its enabling act, ending the policy for good. Given its higher efficiency and less divisive nature, Carney has promised to continue working on and improving the large industry emitters carbon pricing system (Murray 2025).
Whether or not the current leadership implements a more stringent industrial carbon price is hard to tell. However, with your renewed understanding of the carbon pricing system and the Canadian context, it can be much easier to assess the situation and involve yourself in meaningful conversations about carbon prices. Now, you can use this knowledge to stay up to date in an evolving field of mitigation policies and even inform decisions you make in the future!
