The UK played a major role in the successful negotiations on the Kyoto Protocol on climate change and Prescott led the UK delegation at the discussions. In May 2006, in recognition of his work in delivering the Kyoto Treaty, Tony Blair asked him to work with the Foreign Secretary and the Environment Secretary on developing the Government's post-Kyoto agenda.
In a Cabinet reshuffle on 5 May 2006, Prescott's departmental responsibilities were transferred to Ruth Kelly, as Secretary of State for Communities and Local Government, following revelations about his private life and a poor performance by Labour in that year's local elections. He remained as Deputy Prime Minister, with a seat in the Cabinet, and was given a role as a special envoy to the Far East as well as additional responsibilities chairing cabinet committees. Despite having lost his departmental responsibilities it was announced that he would retain his full salary (£134,000pa) and pension entitlements, along with both his grace-and-favour homes, an announcement which received considerable criticism.
The press speculated in July 2006 that, as a consequence of the continuing problems centred on Prescott, Blair was preparing to replace him as Deputy Prime Minister with David Miliband, whilst possibly retaining Prescott as Deputy Leader of the Labour Party, but nothing came of this.
Prescott has come under fire for additional controversies over sexual infidelities. On 26 April 2006, he admitted to having had an affair with his diary secretary, Tracey Temple, between 2002 and 2004. This two-year affair is said to have commenced after an office party and, in part, took place during meetings at Prescott's grace-and-favour flat in Whitehall. Conservative MP Andrew Robathan tabled questions in the House of Commons over Prescott's reported entertainment of Temple at Dorneywood, his official residence, which raised questions over the possible misuse of public finances.
He was criticised for maintaining the benefits of Deputy Prime Minister despite losing his department in 2006. He was criticised for visiting the American billionaire Phil Anschutz who was bidding for the government licence to build a super casino in the UK, and questioned over his involvement in the business of his son Johnathan Prescott. He was photographed playing croquet at his then "grace and favour" home Dorneywood when Tony Blair was out of the country on a visit to Washington. Prescott was mocked in the media – in part because the game was so divorced from his working-class roots – and he gave up the use of the house. He later said that it had been his staff's idea to play croquet and that contrary to press reports, he had not been Acting Prime Minister when he had played the game.
On 7 May 2006, The Sunday Times quoted Linda McDougall, wife of Austin Mitchell, as saying that in 1978 Prescott had pushed her "quite forcefully" against a wall and put his hand up her skirt as she opened the door for him to a meeting in her own house just after her husband became an MP; Prescott had not met McDougall before.