Due to the growing energy needs along with increasing concerns towards control of greenhouse gas emissions, most developing countries are under pressure to find alternative methods for energy conversion and policies to make these technologies economically viable. One of the instruments that have been adopted by many industrial countries is that of the carbon tax. The rate of introducing carbon taxes however, depends upon the local economic conditions and market forces. The case of Indian power sector has been examined by using MARKAL model for introduction of carbon taxes at four different trajectories. Their implications on the power generation choices have been investigated for a time span of 25 years from the year 2000. In general large hydropower plants have emerged as the first choice followed by wind energy systems. However, cheaper availability of coal in India keeps scope of use of coal based technologies for which pressurised fluidised bed combustion technology has been found to be the balanced choice among fossil technologies. There exists a potential of reduction of greenhouse gas emissions by about 25% as compared to the 'business-asusual' case in presence of high carbon tax rates.