Would it be possible to design a carbon tax that the public would enthusiastically support? That would be progressive, rather than regressive, imposing greater costs on the rich than the poor? Is it politically possible to strictly limit the total amount of carbon emitted, without rewarding past polluters with windfall emissions permits? Yes, it is. And it's fun! Politicians -- Here's an opportunity to give money to your constituents, and save the world too! It works like this:

First, enact a carbon tax. Nothing fancy here, just your usual I'm-Greg-Mankiw-Wanna-Join-My-Club? "Pigouvian" carbon tax. Embedded in what drivers pay at the pump, added as yet another surcharge to heat and utility bills, would be a new Federal tax on carbon sold or used as fuel. That was easy.

Unfortunately, a carbon tax is regressive. It imposes disproportionate burden on the poor, as the higher cost of driving to work and heating a home takes a much bigger bite out of a burger-flipper's paycheck than a hedge-fund manager's "capital gain".

But, here's a trick. Just as flattish taxes are regressive, flattish subsidies are progressive. So, when we enact the carbon tax, we grant citizens the right to a refund of the tax on a fixed quantity of carbon consumed. We distribute those refunds equally among all taxpaying US citizens annually. And, we permit citizens to sell any refunds they won't need to use.

Suppose, in the beginning, we set the amount of refunds to be equal to the total expected carbon tax, given 2007 US carbon consumption. This seems dumb, right? In the aggregate, we've just created a system whereby the government collects a tax and sends it right back out again, exacting a net cost of zero from the private sector for its profligate use of carbon. All the government has done is caused transfers within the private sector. Yes. But from whom to whom? Light users of carbon end up receiving cash, from the excess permits they sell, while gas-guzzle-monsters pay up! That's likely to mean that most poorer people earn cash from their allotment, paid for by the people whose Hummers they can't see over. Moreover, note that our refunds are distributed only to taxpaying humans, not to businesses, but businesses are still subject to the tax, and can purchase refunds. That means that on net, the government will have underwritten a transfer from businesses to voters households. The vast majority of human beings will see ka-ching positive net wealth from this scheme, without any cost to the government. People who conserve more will earn more, people who conserve less will earn less, or even have to pay. Businesses will buy refunds from households, so long as the cost of the refund is less than the cost of the tax. When there are no more refunds left to buy -- when aggregate carbon consumption exceeds the refund allotted -- some users will have to pay the tax outright, at whatever rate the government has set.
[...]