The EU's climate chief is facing pressure to explain her failure to crack down on a loophole that allowed alleged fraudsters – a large number of them based in Britain – to make millions of euros through Europe's emissions trading scheme.

Confidential documents seen by the Guardian show that Connie Hedegaard, the European commissioner for climate action, had been informed about fraudsters targeting the Danish carbon registry to enable them to trade in credits last summer, as the UK and the Netherlands were clamping down on the fraud by scrapping VAT on carbon trading.

An MEP last week lodged an official question asking what happened to the Danish registry while Hedegaard was climate minister, and what is being done across Europe to combat carbon fraud.

Denmark is now at the centre of a Europol investigation into carbon fraud worth €5bn (£4.3bn). An estimated 116 arrests have been made so far, around 30 of them in the UK.

Previously, Hedegaard had denied knowing about the suspected fraud until a Danish newspaper reported it in December. "I was never informed about this until last autumn when Ekstra Bladet looked into the fraud," she told the Guardian.

But the confidential climate ministry report seen by the Guardian, entitled VAT Fraud in the European CO2 Quota Register Including the Danish, appears to have been signed with Hedegaard's initials, indicating she was made aware of the problem in August last year.

"The tax department this spring became aware of fraud in the EU with VAT in connection with trade of CO2 quotas and credits. In particular Denmark seems to be the target of VAT fraud," it said.

An appendix attached to the report also dated in August from the Danish tax authorities said that suspicious trades had been identified, most of them linked to the UK. "For now we have two cases with an estimated loss in total of 3.8m Danish kroner [£440,000]. The trades are primarily performed by UK operators with Danish VAT numbers."

"There is still no clear image of how the fraud is organised, but there has been the common feature that the companies involved in the first suspicious transactions were companies from other EU countries that merely held accounts in the Danish quota registry."

Hedegaard, who is now in charge of the EU's carbon market and battling for deeper cuts in Europe's carbon emissions, admitted having seen the confidential document. But she denied she should have acted last summer because "it was a VAT fraud issue".

When invited to clarify her position after a speech she gave at the International Institute for Environment and Development last Tuesday (11 May) she admitted seeing the confidential document, but she denied she should have acted last summer because "it was a VAT fraud issue".

"The whole paper did not hint that there should be a special problem that as a minister I should look into because they didn't know that at the time. It was just a normal criminal thing – somebody making fraud on VAT."

In July last year, the Danish Energy Authority was told by the European Commission to tighten up its procedures for account holders, but only applied the requirements on new accounts.

The number of accounts on Europe's largest registry has since plummeted from 1,200 to 140 and suspected fraudulent trades worth at least €2.11m were made by account holders on the carbon registry even as late as December.

In so-called missing trader fraud, bogus traders open an account in a national carbon registry, buy emissions allowances in one EU country VAT-free and sell them on with VAT added. The trader pockets the VAT without paying it to the national exchequer and the trader goes "missing".

The Danish carbon registry appears to have been targeted because account holders did not need to supply basic information such as VAT numbers. The regulations were simplified in 2007, the year that Hedegaard became Denmark's climate minister, so that the only means of verification for accounts was an email address.

The controversy over the Danish registry comes as Hedegaard faces a battle over a push to increase the EU's commitment to cut carbon emissions from 20% to 30% by 2020, and criticism over draft rules for the quantity of emissions allowed in the crucial third phase of the EU ETS, which includes safeguards to protect the market against misuse by governments and criminal activities.

Danish MP Ida Auken, who has tabled questions on the Danish registry before parliament to the current climate minister Lykke Friis, said: "A third grade child could read this and say there is something wrong with the Danish registry. If the minister had acted straight, she would have stated clearly that a big mistake was made in the Danish registry during her time as minister."

Auken added that although Hedegaard may have genuinely been underinformed by government departments she could have taken decisive action. "Whether her officials had made her aware of the mistakes or not plays a role regarding what she knew at which point, but not in that she as minister carries the responsibility."

Jorgensen, a social democrat MEP, said he was confident that although this time "Hedegaard and her colleagues are taking it extremely seriously", national carbon registries should be administered by tax authorities who are used to dealing with tricky technical revenue issues.

But he added: "My fear is that they [environment directorate general] haven't got the means to deal with it fully. There needs to be a full presentation of solutions before I am satisfied.

"Even though she is not from my political family, I'm not criticising her as a person but I want to put pressure on her to deliver on her administration of the EU ETS."