There is growing concern around the world about the impact of greenhouse gases (GHGs) on the environment and economy. Primarily responsible for global warming, GHG emissions (especially CO2 emissions) are closely linked to the consumption (burning) of fossil fuels.

Countries have not been able to de-link the association between the use of fossil fuels and economic growth until now.

Scientific evidence points to increasing risks of serious, irreversible impacts of climate change (global warming) associated with business-as-usual (BAU) paths for emissions. There is an urgent need to bring down the level of emissions to scientifically acceptable levels considering the fact that costs associated with climate change are significantly higher than the costs of mitigation.

This paper analyses the impact of two post-Kyoto climate policy regimes on GDP growth, CO2 emissions, and welfare in India. Both regimes aim to limit the long-term average global temperature increase below 2°C. The first policy regime is a global carbon tax. The second policy regime is based on emission trading permits; their distribution is based on the Common but Differentiated Convergence approach. The study uses a recursive dynamic CGE model that incorporates features of the energy system for the analysis.

The results suggest that long-term significant reductions in CO2 emissions can be achieved under the two policy regimes and at moderate cost to the economy. The maximum loss in GDP occurs during 2045–50. The growth rate falls from 4.3 per cent in the business-as-usual scenario to 3.2 per cent in the carbon tax scenario and 3 per cent in the Common but Differentiated Convergence scenario. In other periods, the decline in GDP growth rate is not more than 0.3 percentage points. The maximum welfare loss in terms of equivalent variation is estimated at 6.4 per cent in the carbon tax scenario and 5.2 per cent in the Common but Differentiated Convergence scenario in 2050.

From the results the paper also concludes that climate policies could influence the country’s trade balance, and that the degree of influence depends on the exchange rate regime.