A reader brought cap and dividend to my attention. It is like cap and trade, but the revenue would go straight to US citizens rather than to the government.
Here are my thoughts, which are similar to what I said in the comments section.
Cap and dividend sounds tolerably good to me, but there are three problems:
1) If we want to base energy policy on some sort of "cosmic justice", maybe we should use the revenue from cap and trade to reduce the deficit. Think about it: Why are we being compensated for CO2 emissions? It doesn't hurt us much as far as I can tell. It might hurt the people living 50 or 100 years hence. Maybe we can compensate them by lower the deficits and preventing them from having to shoulder a crushing tax burden.
2) There might also be a political economy argument against cap and dividend. What if it turns out that a very large % of CO2 emissions come from a small number of people, say people working in manufacturing? There might then be an incentive for the rest of us to vote for pushing the price of carbon up to very high levels: past the "socially optimal" level. Then we get dividends and the emitters pay the bulk of the price.
3) This scheme is not so different from the policy that Mankiw and others support of using the revenue to lower other taxes. Arguably that's better, because lower taxes would incentivize people to work, save, and invest more. Whereas, just handing out money to people regardless of their behavior is not optimal from an economic perspective. But maybe cap and dividend is more politically doable.