Fraud risks destabilizing the world's effort to tackle climate change according to a huge 360-page report published by Transparency International in Bangladesh on Saturday.

The "Global Corruption Report: Climate Change," with contributions from some 50 authors from around the world, says corruption poses a special risk to the billions of dollars needed to respond to global warming.

According to the report, up to $700 billion (472 billion euros) will likely be mobilized by 2020. Thereafter, it is widely expected that developing countries alone will need at least $100 billion annually to confront the problem.

Yet Transparency International (TI) warns that a massive strengthening of anti-corruption measures will be needed to prevent much of this money going to waste.

"The 20 countries most affected by climate change score below 3.6 on TI's corruption perception index, indicating that corruption in endemic in these countries," said Lisa Elges, manager of TI's climate governance program.

Zero is the worst level of corruption on TI's 10-point scale, but TI is careful to warn that the risk of corruption is not limited to developing countries.

"Corruption nationally is a problem for all countries. We need to ensure the best accountability, transparency and integrity practices in all countries," Elges said.

Attractive booty

In industrialized Europe, one doesn't have to look far for potential pitfalls.

"The European Union's Emissions Trading Scheme (ETS) has shown that carbon markets are susceptible to undue influence from vested interests, which in the case of the ETS may have contributed to the over-allocation of carbon permits" the report said.

Carbon markets may be susceptible to undue influence

"The result was windfall profits of 6–8 billion euros for Europe's four largest power producers."

Bending rules to suit lobbies is just one problem. Another is vulnerability to outright theft: Millions of dollars have so far been stolen in hacking attacks on Europe's ETS.

"It has been depressingly easy," said Henry Derwent, head of the International Emissions Trading Association (IETA).

"The standard of internet security was just insufficient, in particular a number of registries made really no enquiries at all about the applicants for accounts. We've been warning the European Commission about this for over a year."

In January, hackers cracked into the databases of registries in the Czech Republic, Austria, Estonia, Greece and Poland, making off with certificates worth 28 million euros.

Derwent is optimistic that reforms to the ETS will make it "a lot easier to supervise" in future, but these kinds of expensive teething problems threaten to permeate the effort to tackle climate change.

Bending the rules

TI's report warns that the trade in emissions certificates - at the heart of the United Nations-backed effort to tackle climate change - is particularly susceptible to conflicts of interest.

There is "no room for any independent oversight of decision-making" in the UN's Clean Development Mechanism (CDM), TI's report laments, suggesting that the system which allows wealthy nations to offset their emissions by investing in reductions in poor countries appears open to abuse from vested interests.

One example involves the industrial gas HFC-23, which is a by-product of manufacturing coolants and a greenhouse gas 11,700 times more potent than carbon dioxide.

The Clean Development Mechanism is meant to cut emissions, not foster them

"By destroying one ton of HFC-23, you get 11,700 carbon credits. This makes it a very lucrative business, because every carbon credit equals about ten euros," Eva Filzmoser, from the organization CDM Watch, told Deutsche Welle.

Until recently, factories in China were suspected of turning this process into a business model – producing excessive levels of the pollutant in order to claim credit, and money, for destroying it.

"The CDM incentive has a direct impact on the production patterns of those plants. We would actually propose to cut this by 90 percent. We think only ten percent of carbon credits are needed to provide enough incentives to keep destroying this gas," Filzmoser said.

Although the European Union's executive has proposed banning the trade in HFC-23 permits beyond 2013, critics like CDM Watch say the UN system remains insufficiently transparent.

Corruption feeds deforestation

Illegal logging is another area highlighted by TI.

According to the organization's report, up to $23 billion dollars worth of wood is derived from illegal logging operations every year.

TI said that many of the forestry sector's biggest companies are prepared to collude with corrupt governments to log rare and valuable timber, despite marketing campaigns aimed at appealing to more environmentally conscious consumers.

"In many cases these attempts would appear to be a cynical mechanism to maximize profit at taxpayers' expense, as their actual practices belie their commitment to their publicly stated developmental aims," the TI report said.

Other non-government organizations agree.

"Corruption is one of the main reasons why we continue to have such high levels of deforestation," said forestry expert Philipp Göltenboth from the World Wide Fund for Nature (WWF).

"Forests, especially in the tropics, are often difficult to reach and they're often located in countries with a high corruption index. Wood can quickly be turned to money,"

Gavin Hayman from Global Witness, which monitors resource exploitation, said Cambodia provided a striking example of years of corruption in the forestry sector.

It's hard to track the origin of timber, forestry experts say

"We've been able to show how the prime minister and members of the ruling elite had direct interest in corruption in the forestry sector and actually allowing concessions to loggers which then devastated Cambodia's forests."

"At a stroke of a pen from a government official, a huge area of pristine forest can be handed over to a company…that's a large amount of money which doesn't tend to go to the country, it goes to individual's concerns. So effectively, the government can use its discretionary executive powers to award companies that are friends," Hayman said.

Things to come

The corruption report's chapters on forestry offer a sober warning to one of the few achievements to come out of last year's climate conference in Cancun.

The scheme known as REDD (Reducing Emissions from Deforestation and Forest Degradation) aims to eliminate excessive logging by encouraging rich nations to invest in poor nations' forests.

It could generate up to $28 billion dollars a year once fully operational, but TI warns that it could backfire without much tougher oversight.

"The vast majority of countries participating in (REDD arrangements) are poorly prepared to measure and verify changes in forest carbon emissions and carbon stocks."

Throwing billion of dollars into this atmosphere is a recipe for disaster, the report warns.

"In countries where (accountability) mechanisms are not fully functional or are politically compromised, (REDD) payments may in fact offer incentives for corruption and fraud by government officials and project sponsors seeking to 'game the system.'"

Unless rules are tightened soon, billions of dollars – not to mention public faith – could be thrown out the window

Author: Sarah Steffen

Editor: Nathan Witkop