* Government says waiting for post-Kyoto pact before setting new targets
* New Zealand carbon prices plummet
* Policy proposals likely to keep carbon prices cheap
By Gyles Beckford
WELLINGTON, Nov 2 (Reuters) - Just two years after expanding a scheme that was feted as the world's only emissions trading scheme outside of Europe, New Zealand has effectively put the scheme on hold, just as other nations step into the carbon trading arena.
The government says it can comfortably meet its 2008-12 emissions target under the U.N. Kyoto Protocol climate pact and will gauge the need for tougher action when it sees what other countries commit to in talks for a new U.N. pact from 2020.
New Zealand has said it would opt for emissions cuts of between 10 and 20 percent f rom 1990 levels by 2020 depending on the ambition of the next pact. In the meantime, the government says the local carbon price should be kept as low as possible.
"This means the emissions trading scheme will continue to deliver a price signal that falls far short of what is required to achieve any emission reductions at all," said Lizzie Chambers of New Zealand online trading platform Carbon Match.
Parliament is expected to approve amendments within weeks to allow the unlimited flow of cheap U.N.-based carbon offsets to New Zealand that have driven down the price of domestic pollution permits to a tenth of what they were last year.
The proposals also extend indefinitely a sweetener for polluters to submit one permit for every two tonnes of emissions. New Zealand is the only country to offer the scheme, which halves carbon costs and was previously due to end in late 2012 or early 2013.
The result is that New Zealand polluters can meet their emissions obligations at a fraction of the cost paid by their competitors in Europe and Australia. Cheap carbon costs give businesses little incentive to invest in ways to cut emissions.
"Hollowing it out like this makes a farce of our climate change commitments," independent Parliamentary Commissioner for the Environment, Jan Wright, said in a recent statement, referring to the amendments.
The government is under little pressure from voters to toughen a scheme launched in 2008 by a previous administration, unlike neighbouring Australia where voters have mandated tougher action on climate change.
Low domestic carbon prices will lead to fewer trees being planted and even deforestation, New Zealand's Forest Owners Association says.Forest plantations had been a major source of domestic permits, called New Zealand Units (NZUs), before the influx of cheap international permits.
New Zealand's scheme is the only national programme that allows polluters to meet all emissions obligations with U.N.-backed carbon offsets. Europe and Australia have imposed strict limits on the use of U.N. offsets.
The U.N. offsets, called Certified Emission Reductions (CERs) hit all-time lows last week, touching 71 euro cents a tonne on limited European demand due to the economic crisis. CERs have fallen from around 13 euros in June last year.
Unlimited imports of the offsets have driven the price of NZUs to NZ$2.50 ($2.06) a tonne, down from NZ$20 18 months ago.
By comparison, Australia's carbon tax, which started in July, is A$23 ($23.8, NZ$29) a tonne with no imports of UN offsets till 2015. European pollution permits called EUAs are trading around 8.2 euros ($10.60, NZ$12.90) a tonne.
As New Zealand eases measures to curve carbon emissions, others in the region are rolling them out. South Korea is launching a scheme in 2015, while China is embarking on seven pilot programmes.