Key Points:

A carbon tax will be explored again as an alternative to the emissions trading scheme in a special select committee review negotiated between National and Act in their confidence and money-supply agreement.

National campaigned on a policy to amend the law passed in October by the Labour-led Government setting up the emissions trading scheme.

Act, a party of climate change sceptics, campaigned on a policy to abolish the scheme altogether. It wants a carbon tax.

The compromise is to conduct a select committee review that will include all parties in Parliament.

Labour favoured a carbon tax in its second term, but it was rejected after the last election by its support partners at the time, New Zealand First and United Future.

The confidence and supply agreement between National and Act released yesterday says: "National agrees to a special committee of Parliament of the current emissions trading scheme legislation and any amendments or alternatives to it, including carbon taxes, in the light of current economic circumstances and steps now being undertaken by similar nations."

It also says National agrees to an amendment delaying the implementation of the emissions trading scheme, and repealing the ban on new power stations using thermal generation.

Act's position has changed markedly over the years. When Labour proposed a carbon tax, Act opposed it and National wanted an emissions trading scheme.

When Labour proposed an emissions trading scheme, Act supported a carbon tax. It has now won a review that will include looking again at a carbon tax.

The terms of reference for the select committee review have not yet been decided.

The Act Party yesterday released its preferred terms, which include going back to basics and hearing "competing views on the scientific aspects of climate change from internationally respected sources".

But National has yet to produce its terms of reference and Mr Key said the final ones would be developed between the two parties.

However, the select committee itself will have to be happy with the terms of reference because political parties cannot instruct committees of Parliament.

Mr Key said New Zealand would honour its Kyoto obligations and needed to play its part when it comes to climate change.

"How we price carbon emissions in our economy is something we need to make sure that there is predictability and some degree of certainty for New Zealand businesses and we intend to do that."