“Many people now agree that it is vital to make the cost of carbon explicit if we want to reduce greenhouse gas emissions. The FT’s leader on 2nd January 2009, for example, emphasises the importance of a carbon tax.”

“The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”

“For years, Peter Barnes has advocated a brilliant means of mitigating many of the harmful economic side effects: take the revenue from carbon taxes or auctions and rebate it back to the people, dividing it equally among each citizen.
Barnes advocates doing this via an auctioned permit system. However,the same thing could be done with a carbon tax. Instead of auctioning permits, simply tax those same embedded emissions and rebate that revenue to consumers. Raise the tax periodically to lower emissions.
Inevitably, with either a tax or auctioned permits, the price charged for carbon will be passed down the supply chain to consumers. By rebating the revenue back to consumers, you minimize the impact of those price increases. They have to pay more, but they have more money to pay with. You get the price signals to affect behavior, without lowering consumer net income.”