New South Wales' Division of Local Government has classified carbon credits to be in the same league as financial products, in effect saying carbon trading is as risky for local councils to trade in.

However, the federal government is disputing the NSW ban which was imposed in 2010 after the global financial crisis to prevent the loss of council money primarily through derivatives which are considered risky financial products.

A spokesman for Climate Change Minister Greg Combet pointed out that carbon credits are investments and should not be considered risky investments.

NSW Local Government Minister Don Page, who disallowed carbon credits to offset increases to rates and landfill fees, said the federal government could actually provide state governments backing on carbon credits but will not do that because of risks linked with carbon credits in the future.

The opposition, seizing the opportunity to push for the repeal of the carbon tax, said the policy flaw is a confirmation that the only way to fix the issue is scrap the tax, said Coalition climate action spokesman Greg Hunt.

Mr Hunt pointed out that more chaos would happen if NSW councils would risk breaching the law by buying carbon credits to pay their carbon tax bills.

"It is appalling for the federal government to have put these councils in legal limbo which may end up as a constitutional battle," Mr Hunt said in a statement.