The Government has dumped its planned carbon tax, but more targeted tax could still proceed.

The u-turn on the $360m a year tax was announced today by Climate Change Minister David Parker.

The tax, designed to reduce greenhouse gas emissions, was set to come into effect in April 2007.

Mr Parker said rising oil prices had already partly achieved the intended effect of the tax in the transport sector and officials had advised the tax would not cut emissions enough to justify its introduction.

However a more narrow carbon tax targeting the electricity generating sector and major power users remained likely and a more broad-based carbon tax could be considered after 2012.

Cabinet would look at alternative policies aimed at reducing emissions early next year.

Critics have said costs would have to be passed on to consumers, with petrol and power prices among items likely to be hiked.

Business leaders welcomed the move. But it was attacked by the Green Party, whose co-leader Jeanette Fitzimons said: "What is clear is that the Government views the rise in New Zealand's carbon emissions as inevitable and that they are only going to try and slow the trend, rather than reversing it."

A Government review of climate change policies has found the tax is unworkable in its current form.

The review proposes alternative options for reducing carbon emissions. Minister of Forestry Jim Anderton said officials had been asked to look at alternatives to current proposals for address the issue of greenhouse gas emissions from deforestation.

The proposed carbon tax has come under fire from business lobbyists, opposition MPs and consumer groups who say it will make businesses less competitive.

Government support parties New Zealand First and United Future oppose the tax.

The Government estimated the tax would cost the average household about $4 a month, but other estimates put the cost at about $10 a month.

It is understood the alternative options being considered by the Government could include some levies, but they would be much narrower so as to exclude mass consumer items.