Earlier this year, the federal carbon tax came into effect. That means carbon—in forms including gasoline and diesel—is more expensive.

The carbon tax has been the Liberal government’s signature policy to address the climate crisis. As the federal election is quickly approaching, here’s a rundown of what the carbon tax is, and some of its potential economic and environmental consequences.

Ontario, Manitoba, Saskatchewan, New Brunswick, Nunavut, and Yukon are all covered by the federal tax. All the other provinces and territories are expected to develop their own comparable systems. In some cases, they already have.

For this reason, the new federal tax is referred to as a “backstop.” It’s meant to cover the parts of the country that don’t have carbon pricing systems that meet the federal benchmark for emission reduction.

A carbon tax is a type of carbon pricing. Cap and trade is the other major type of carbon-pricing policy and is explained in an earlier edition of The Lazy Economist. The goal of any carbon pricing system is to make emitting greenhouse gases more expensive so people and corporations will use less of them.A carbon tax does this by putting a tax on each unit of emissions (for example, $50 per tonne of carbon dioxide). 

There are many ways to design a carbon tax, but in Canada, both households and industrial emitters are subject to the tax. Emissions-producing products, such as gasoline, diesel, and natural gas, will be taxed when purchased. Large industrial emitters (such as oil and gas extraction operations and energy companies) will also be taxed per tonne of emissions.

One feature of this tax is that it’s revenue-neutral, meaning the government doesn’t expect to make any money from it.

One of the major objections to the carbon tax is that it’s bad for the economy—in other words, it could trigger a recession, or reduce competitiveness of Canadian oil and gas companies.

Although slower economic growth might be a sacrifice the government decides to make in order to reduce emissions, luckily, there doesn’t seem to be much concern among economists about the carbon tax triggering a recession. Many have called the idea “unfounded.”

Another objection to Canada’s current carbon pricing system is that it doesn’t do enough to limit emissions.

The current system will gradually increase the price per tonne of carbon dioxide to $50 per tonne in 2022. The Parliamentary Budget Office carbon price would need to rise to $102 per tonne by 2030 if Canada is to meet its Paris Climate Accord emissions targets.

For now, Environment and Climate Change Minister Catherine McKenna has stated that the government doesn’t intend to raise the carbon tax after 2022. Instead, it intends to seek other strategies, such as investment in cleaner alternatives, to meet Canada’s Paris commitments.

Altogether, the carbon tax is a relevant piece of the government’s current plan. With the election coming up, you now know a little more about the current government’s signature climate change policy.