From a game design PoV, using units to represent civilian population is an inexcusably bad choice, so I'll give them the benefit of the doubt and refuse to believe that is their reasoning until they say it themselves. I'm perfectly ok with a feature to represent impact of limitless growth, but linking that to military units is a 100 % no-go because it interlinks two completely different aspects of the game an punishes the player for doing something that is a necessity in game, namely having a standing army for defense.
I agree that the obvious and only viable way to handle CO2 from civilians would be a per-pop penalty that would trigger once you research combustion. This should also allow you to build some sort of public transport - either as a building in the city centre, or as it's completely own public transport district. This would also allow some cool interaction with the railroad system which is arguable quite half-hearted in its implementation. So you could have a public transport district where you could put down a bus terminal (reduces per pop CO2), a train station (bonus gold and/or production from connecting to other cities via railroads) and perhaps even a domestic airport (causes CO2 but will give bonus tourism).