Agreement between National and Labour on an emissions trading scheme, a "grand coalition" of the two main parties, is very much on the cards as the Government gets to grips with one of its most pressing legislative issues.

The scheme, known as an ETS, is a vital component of climate change strategy and has been a problem since the previous government pushed its own version through Parliament just before last year's election.

National put it on hold because it thought its impact on consumers and the economy was too much to bear, and a special select committee reviewed it.

The ETS isn't something that has grabbed much public attention, although there has been intense lobbying by the sectors which will be affected by it.

It is complicated and its effects won't be felt for months, years in some cases, but everyone is going to feel its bite when petrol starts going up and costs begin to increase pretty much across the board.

To simplify it to what is probably a dangerous extent, an ETS imposes a cap on greenhouse gas emissions on all sectors of the economy. Not all sectors come under the regime at the same time.

Those that exceed their limits would have to buy carbon credits from those under their caps.

That is how the ETS passed by Parliament works, and it has plenty of detractors.

The aim is to force industries to meet the limit imposed on them, or pay the price. Those who do well are rewarded.

The select committee's review report, released last week, was a messy business. It made 34 broad recommendations but it was nowhere near acceptable to most of the parties in Parliament.

Labour, the Greens, the Maori Party and ACT all put in dissenting minority reports.

The ETS is so important it must have solid support in Parliament, and that is where the "grand coalition" comes in.

The great advantage is that an agreement between National and Labour would carry authority and it would deliver the numbers - 101 votes out of 122 to get the legislation passed.

The minor parties would complain bitterly from the sidelines with little or no effect on the outcome.

Both the main parties have said they are ready to talk.

Labour leader Phil Goff last month proposed a meeting between himself and Prime Minister John Key but Mr Key wasn't keen on that.

There are suspicions that Goff is seeking to emulate the sort of publicity Key gained when he struck a deal with Helen Clark over the law that bans smacking.

In that event, Clark and Key appeared at a joint press conference to announce the deal and it was considered Key was the winner in political terms.

What has happened is that Climate Change Minister Nick Smith and Labour's spokesman on the issue, Charles Chauvel, will begin negotiating as early as this week.

That makes sense - they are the ones who have been dealing with it and they must know a lot more about the detail than either Key or Goff.

Smith wrote to Labour proposing talks and Chauvel responded, saying negotiations presented "a golden opportunity to reach a broad consensus and take New Zealand's ETS design off the political battlefield once and for all".

On the face of it, the two sides don't seem all that far apart. Labour agrees with most of the recommendations in the select committee report.

But there are some really contentious, core issues to be thrashed out. Not least is when agriculture comes under the limitations of an ETS.

That has far-reaching implications for the economy, and New Zealand has a much higher proportion of agricultural greenhouse gas emissions than any other country.

Farmers don't want to be under an ETS at all.

The optimistic timeline is to have an amended ETS in law by the end of the year so the Government can present it at an important international conference in December.

Unless Smith and Chauvel can achieve something really remarkable, that isn't likely to happen.

The conditions of the existing ETS, which is still in law, start coming into effect in January next year when energy and transport are due to come under the regime.

Key has already floated the possibility of a six month delay.

As Smith has pointed out, New Zealand isn't the only country having difficulty constructing an ETS. Others are dealing with the problem of political consensus because of the way handling climate change divides parliaments around the world.

For New Zealand, this presents a real test of political will which will be judged on an international stage. Success in creating an ETS supported by the main parties will be seen as a strong indication that New Zealand is serious about climate change.

That has significant trade implications and failure would be a severe setback.

It is a difficult balancing act for the Government and Labour. The ETS must be strong enough to impress other countries while not being so tough that it risks a dangerous backlash at home and threatens the economy just as it comes out of a recession.

- By Peter Wilson, NZPA Political Editor