Carbon Tax 101: Clearing the Air on the Criticisms

By Agastya Kaul

Photo by Anthony Maw, from Unsplash

With 2025 upon us, Canada prepares for an election that will shape its future for years to come.

The Conservative Party of Canada (CPC) is the clear frontrunner, with recent polls showing them more than 20% ahead of their closest rivals, the Liberal Party and the New Democratic Party (Grenier, 2024). Throughout their campaign, CPC leader Pierre Poilievre has focused on the slogan "Axe the Tax," emphasising the removal of the fuel charge, widely recognised as the carbon tax.

Picture by Engin Akyurt, Unsplash

The carbon tax, introduced in 2019, is designed to incentivise households and industries to transition from non-renewable energy sources primarily oil and gas to renewable alternatives. Under the carbon tax policy, Canada is expected to cut its emissions by 226 million tonnes within the next five years, contributing to its goal of reducing carbon emissions by 40–45% in line with its G20 commitments (Rabson, 2023; Beugin et al., 2024).

With the tax now at the centre of political debate, discussions have emerged about its impact on average Canadians and its effectiveness in achieving the 2030 targets. Economists have also raised concerns about widespread misinformation and misrepresentation of the policy to both the public and political parties. This article aims to explain how the carbon tax operates and address the concerns surrounding it.

What is Canada’s Carbon Pricing?

The Canadian Carbon Pricing consists of two distinct policies: (i) fuel charge (carbon tax) and (ii) the large-emitter trading systems (LETS) (Beugin et al., 2024). While we focus on the carbon tax, the LETS policy is also important as it helps to significantly bring down emissions on the industrial side of the economy.

The carbon tax is a levy aimed at incentivising consumers to transition from fossil fuel use to renewable energy sources. It places a fixed price per tonne of fuel consumed at the gas station or when heating homes with natural gas. When it started in 2019, the tax was at C$20 per tonne and went up by $10 a year to $50 in 2022. It’s now increasing by $15 a year until 2030 when it will reach $170 per tonne (Zimonjic, 2022; Rabson, 2023; Markusoff, 2023).

As mandated by law, Environment and Climate Change Canada then redistributes carbon tax revenue through a rebate system, allocating 90% directly to households and 10% to initiatives such as helping businesses improve energy efficiency or increasing rebates for rural residents (Canada’s Carbon Pricing (a.k.a. “Carbon Tax”) Explained - David Suzuki Foundation, 2025). Rebates are calculated based on family size in most provinces, except in British Columbia, where they are income-based, and in Quebec. Consequently, most low- and middle-income households receive more in rebates than they pay in carbon tax (Fletcher, 2023; Tombe, 2024).

Photo by Krzysztof Hepner, Unsplash

Concern 1: The Carbon Tax is a Major Cause of Inflation

A common belief is that the carbon tax significantly contributes to inflation by increasing transportation and logistical costs for businesses, coupled with higher consumer costs for fossil fuel consumption. This belief has become the cornerstone of the CPC’s campaign messaging.

However, both an open letter by Canadian economists and studies by the Bank of Canada suggest that this perception is misguided (Ragan, 2024). They highlight how inflation in the Canadian economy, particularly between 2021 to 2023 was driven mainly by global factors, like the COVID-19 pandemic and the Russo-Ukraine War which disrupted supply chains, increased commodity price volatility, and led to pent-up demand and rapid money supply growth(Ragan, 2024). A September 2023 report from the Bank of Canada found that the $15 per tonne annual increase in the carbon tax only contributes 0.15% per year to the rate of inflation in Canada — a minimal impact that contradicts the lofty claim of it being a major inflation driver(Markusoff, 2023).

Concern 2: The Carbon Tax Doesn’t Help Reduce GHG Emissions

After inflation, the next biggest criticism is that the tax imposes an unnecessary financial burden on Canadian households while failing to effectively reduce greenhouse gas (GHG) emissions(Markusoff, 2023; Ragan, 2024; Oates, 2024).

A report by the Canadian Climate Institute(Beugin et al., 2024) shows that the current emission-reducing policies are leading to the “prevention of 226 million tonnes (Mt) of carbon emissions [by] 2030”. Among these policies, the consumer carbon tax and its industrial counterpart, the Large Emitter Trading Systems (LETS), play significant roles. The carbon tax is projected to prevent 19 to 22 Mt (7–8%) of emissions, while LETS is expected to account for reductions of 53 to 90 Mt (23–39%). Without these measures and the broader climate policy, total emissions in 2030 would reach an estimated 775 Mt — 41% higher than the levels projected under current legislated policies.

Together, the carbon tax and LETS are expected to drive nearly half of Canada’s emissions reductions by 2030, underscoring their crucial presence in addressing climate change and meeting Canada’s carbon reduction goals(Beugin et al., 2024).

Concern 3: Why Does the Carbon Tax Have a Rebate System? Doesn't That Defeat the Purpose of the Tax?

Picture by Michelle Spollen, Unsplash

The carbon tax is designed to encourage consumers to reduce their use of carbon-intensive products by making such products more expensive. To offset the financial impact on households, the government provides quarterly rebates. As noted in the open letter by economists, "The price-and-rebate approach provides an incentive to reduce carbon emissions (due to the price) while maintaining most households’ overall purchasing power (due to the rebate)."

Research by University of Calgary professor Trevor Tombe (2024b) indicates that lower and middle-income households often receive rebates that exceed the amount they pay in carbon taxes. This is because these households typically consume less carbon-intensive energy, resulting in lower tax payments, yet they receive the full rebate amount. In most provinces, rebates are family-dependent and not income-based, so the amount provided is uniform for families of similar sizes. Consequently, higher-income households, which generally have higher carbon consumption and thus pay more in carbon taxes, are more motivated to reduce their carbon-intensive expenditures to benefit from the rebate system.

This policy approach maintains overall purchasing power for Canadian households while still incentivizing lower carbon consumption. Those who reduce their carbon footprint benefit more because they incur lower carbon fees but still receive the full rebate. The policy precariously balances economic and environmental objectives, promoting sustainable choices without the bigger cost of financial burdens.

Concern 4: The carbon tax and carbon pricing in general, isn’t necessary.

While Canada can discard the carbon tax to still hit its climate targets, it would come at a higher cost. The current carbon tax is the most efficient and cost-effective policy which comes at the least economic cost to the average Canadian (Ecofiscal, 2022; Fletcher, 2023; Hanington & Suzuki, 2024).

The policy and its mechanism are simple: If a good costs more for the consumer (i.e. non-renewable energies), they will use less of it (Ragan, 2024).

The carbon pricing policies provide flexibility to households and businesses to personalise and maximise their reduction in carbon emissions. If the carbon pricing policies were to be ‘axed’, alternative measures and regulations would need to be introduced. They’ll need to be more stringent and intrusive on carbon-intensive industries to accommodate the variety of businesses and households (Allan et al., 2019; Hanington & Suzuki, 2024). Moreover, the complexity of the implementation and enforcement of such regulations would end up causing a larger economic cost than carbon pricing.

Despite its calls to 'axe the tax’, the CPC has yet to present a viable alternative for reducing carbon emissions. As Canada strives to meet its climate commitments, carbon pricing remains the most effective and cost-efficient approach available. Abandoning this policy in favour of more expensive, stringent measures—or worse, no measures at all—would be both irresponsible and shortsighted.

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Beugin, D., Kanduth, A., Sawyer, D., & Smith, R. (2024, September 16). Which Canadian climate policies will have the biggest impact by 2030? - 440 Megatonnes: Tracking Canada’s path to net zero. 440 Megatonnes: Tracking Canada’s Path to Net Zero. https://440megatonnes.ca/insight/industrial-carbon-pricing-systems-driver-emissions-reductions/

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