Labour is accusing the Prime Minister of ignoring a legal opinion on the impact of the Emissions Trading Scheme (ETS) in order to do a deal that cannot be justified.
The opinion, prepared for Crown Law last year, found no evidence of a breach in obligations during Treaty settlement negotiations with iwi, suggesting the Government does not need to do a deal with Maori forest owners over its ETS.
Mr Key has said that just because it is a legal opinion does not mean it is right.
However, Labour Party leader Phil Goff says the Prime Minister is using the potential for legal action as a smokescreen so he can do "a secret and dirty deal that can't be justified".
The Government is negotiating with Ngai Tahu and four other iwi about giving them the right to plant native forests on conservation land and claim carbon credits. This would form part of a deal with the Maori Party to support National's ETS.
The iwi believe the scheme will undermine Treaty of Waitangi settlements they negotiated in the 1990s.
The Government hopes the proposed agreement with iwi will prevent legal action by groups who say the Crown was not upfront during Treaty negotiations about the impacts of an Emissions Trading Scheme.
Key withdraws accusation
Meanwhile, during an exhange in Parliament on the ETS on Wednesday, Mr Key had to withdraw an accusation that opposition leader Phil Goff is using race-based politics.
The Prime Minister said he agreed with comments by the Green Party co-leader Metiria Turei that Labour was playing to the worst kind of politics.
But he withdrew that at the Speaker's request, after Mr Goff took offence.
Mr Goff told Morning Report that any deal that will buy the Maori Party's support for the scheme needs to be subject to examination and clarity.
Negotiations only if Treaty issues are involved
Climate Change Issues Minister Nick Smith says the negotiations are only with iwi that feel the scheme will undermine the value of earlier Treaty settlements.
He says any Maori owner of forests planted before 1990 will be treated the same as anyone else if there are no Treaty issues.
Dr Smith told Morning Report the Department of Conservation has been negotiating similarly with other groups and if those deals are good enough for the private sector, it is useful to also offer them to iwi.
The Finance and Expenditure Select Committee, which had been considering the bill, was deadlocked and unable to recommend it to Parliament.
The Climate Change Response (Moderated Emissions Trading) Amendment Bill will now return to Parliament unamended.
National's scheme better than Labour's - Katene
Maori Party environment spokesperson Rahui Katene says the party is seeking concessions to protect Maori from the effects of climate change, such as energy price rises and restrictions on land use.
Mrs Katene told Waatea News National's scheme is significantly better than Labour's, and doing nothing wasn't an option.
"A lot of our marae are built at sea level and even when they're built a bit higher, with sea level coming higher, they're going to be getting I guess you could call them refugees from the coast," she said.
Green Party co-leader Russel Norman is warning the Maori Party a deal with the Government would be a mistake, as generations of Maori and Pakeha will be lumbered with a huge fiscal cost.
Dr Norman says the scheme will be bad for the environment because it will result in an increase in emissions.
Call to exclude agriculture
Federated Farmers wants New Zealand to follow Australia's lead and permanently exclude agriculture from the scheme.
The organisation's president, Don Nicolson, says the Australian decision gives farmers there a competitive advantage in international trade over their New Zealand counterparts.
The Greenhouse Policy Coalition says it has written to the Government asking that the scheme be put on hold pending the outcome of the United Nations climate change conference next month.
ETS statements 'extreme'
Business New Zealand says extreme and misleading statements are causing unnecessary confusion and fear about emissions trading.
The warning comes as it is estimated that proposed changes to the scheme are expected to increase debt by $110 billion by 2050. Nick Smith has said the numbers are not credible and figures beyond the first decade of the scheme are highly speculative.
Business New Zealand's report, The Subsidy Myth, rejects claims that farms and businesses will get a subsidy from households under proposed emissions trading legislation.
Chief executive Phil O'Reilly says the subsidy myth is based on the mistaken belief that 'households are good and business is bad' and that business should be punished for any emissions.
He says the reality is greatly different, and consumers need to see a price signal on carbon in order for carbon emissions to be reduced.