On July 1, 2008 British Columbians saw gas prices rise by 2.34 cents per litre and on July 1, 2009 gas prices increased again by an additional 1.17 cents. This is a result of the carbon tax introduced by the B.C. government in July of 2008 as part of its Climate Action Plan. The Climate Action Plan commits the Province to a 33% reduction of greenhouse gas ("GHG") emissions by 2020. B.C.'s carbon tax has attracted much attention in its first year. It is the first tax of its kind in North America and was a hot-button issue in the recent provincial election.

The carbon tax applies to the purchase or use of all fossil fuels by individuals and businesses within B.C. As of July 1, 2008, the tax rate was $10 per tonne of carbon-dioxide (CO2) equivalent emissions, and it will increase annually by $5 per tonne until it reaches $30 in 2012. The amount of GHG emitted when a given quantity of a particular fossil fuel is burned depends on the chemical makeup of the fuel. Tax rates are assigned to fossil fuels based on each fuel's per tonne rate of CO2 equivalent emissions. For example, as of July 1, 2009 the tax rate on gasoline was 3.51 cents per litre, the tax rate on jet fuel was 3.92 cents per litre and the tax rate on propane was 2.31 cents per litre.

The carbon tax puts a price on GHG emissions and is designed to use basic market principles to reduce the overall level of emissions. In theory, the tax should send a price signal that will lead to decreased demand for carbon-heavy products and encourage businesses and individuals to make "climate-smart choices" by finding ways to reduce reliance on fossil fuels through new technologies and other means.

The carbon tax was designed to be revenue neutral, meaning all revenue generated by the carbon tax will be returned to taxpayers through tax reductions. The Carbon Tax Act requires the government to present an annual plan that includes a forecast that the tax will be revenue neutral in relation to each fiscal year. The plan must also forecast carbon tax revenues and set out the measures that will be implemented to return the revenues generated to taxpayers. For the first two years, these measures include a personal income tax decrease for the bottom two personal income tax brackets of approximately two percent in 2008 and five percent in 2009, a new low-income climate action tax credit, a one percent reduction in the corporate income tax small business tax rate, and a one percent reduction in the general corporate income tax rate.

The carbon tax is just part of the B.C. government's Climate Action Plan and will be supplemented by a GHG cap and trade system. The cap and trade system will put a limit on overall emissions while setting up a market based framework that will allow emitters to trade in emissions allowances and offset credits (see "The Emerging Canadian Carbon Market: New Fundamentals and Opportunities" by David Thring).