This dissertation investigates the optimal policy for reducing emissions on an aggregate level and in segregated sectors of the economy of the United States and Pakistan using the Dynamic Stochastic General Equilibrium model with New Keynesian assumptions. Three types of environmental policies are added for the reduction of carbon emissions namely Carbon Tax, Emission Cap and Intensity Tax. The optimal policy is then investigated for the government to curb greenhouse gas emissions when productivity shock, monetary shock and government spendings shock are introduced into the economy. It was determined that the Emission Cap policy acts optimally on the aggregate level and each sector of the United States whereas in the case of Pakistan economy, on an aggregate and segregated level, Carbon Tax outperforms alternatives considering mean values and variations in various economic and environmental variables. The policy which performed optimally at aggregate level sustained to be the best at a segregated level also. The performance of specific environmental policies differs when considering a developed economy, which in this case was the United States, and developing country, that is, Pakistan.