A carbon tax is a tax on the carbon content of fuels — effectively a tax on the carbon dioxide emissions from burning fossil fuels. Thus, carbon tax is shorthand for carbon dioxide tax or CO₂ tax.

Carbon atoms are present in every fossil fuel — coal, oil and gas — as is hydrogen. The bond between hydrogen and carbon atoms is the primary source of energy from fossil fuels and of the heat released in fuel combustion. Essentially all carbon atoms are converted to CO₂ when the fuel is burned. Carbon dioxide, an otherwise non-lethal and innocuous gas, rises in the atmosphere and remains resident there, trapping heat re-radiated from Earth’s surface and causing global warming and other harmful climate change. In contrast, non-combustion energy sources — wind, sunlight, falling water, atomic fission — do not convert carbon to carbon dioxide. Accordingly, a carbon tax (or CO₂ tax) is effectively a tax on the use of fossil fuels, and only fossil fuels.