The sustainable development of urban transportation system demands a trade-off between economic, social, demographic, geographic, and political concerns. To address these concerns there is a need of induction of viable transportation policies. In order to examine, the effect of these policies, a system dynamics modelling framework has been presented. A simulation model has been developed to analyse the emission reduction policies. The proposed model integrates the induced travel demand in its structure in order to incorporate dynamic response of transport users. Finally, the impact of different polices like providing separate pedestrian lanes, increase in vehicle occupancy, application of telecommuting and land use pattern change in terms of vehicle emission has been assessed. The results are compared with the case when the impact of induced travel demand is not considered. It is concluded that the dynamic analysis gives a realistic assessment of emission reduction policies.