AMSTERDAM (AP) - Customs agents this week arrested nine people in the London area suspected of a multimillion dollar fraud in trading carbon permits, bringing attention to a rich new field for crime sprung from the fight against climate change.

The arrest confirmed fears among law enforcement officers that swindlers - operating from the trading floors of Europe to the tropical forests of the Pacific - are being attracted to a market that has grown to more than $100 billion.

A few years ago, carbon dioxide, for most people, was just the breath you exhaled. Today it's more likely to be seen as a pollutant derived from fossil fuels that needs regulation, making permission to produce it a commodity that can be traded like gold, oil or hog futures.

Trade in CO2 permits has expanded exponentially since the European Union required thousands of industries to limit carbon emissions to specified targets. Industries exceeding their ceiling can buy credits from companies that have held their emissions below target, acting through commodities exchanges. The average price this year for a ton of carbon is about $15.

That carbon market will get a lot bigger if the U.S. Congress passes its own cap-and-trade bill, the central component of President Barack Obama's climate and energy policies.

And it will grow bigger still if a new international climate change agreement will include financial incentives for countries to protect their forests. Negotiators from 192 countries hope to conclude a global warming accord at a major U.N. conference in Copenhagen in December.

On Wednesday, 130 British customs agents raided 27 properties in and around London for evidence of a ``carousel fraud'' believed to have robbed the treasury of 38 million pounds ($63 million) in unpaid value-added tax. Seven men and two women were arrested and released on bail.

Customs spokeswoman Sara Gaines said it was the first time the scam has been uncovered in the carbon market, expanding from the more established trade in mobile phones and computer chips.

The carousel fraud, also known as a missing trader scheme, exploits VAT-free commerce between countries. Conspirators import goods free of tax, sell it domestically with VAT to another company, which exports the products to third country. Rather than pay the VAT owed to the government, the merchants pocket the tax and disappear.

In July, France, the Netherlands and Britain initiated action to pre-empt the swindlers. France and Britain set a zero VAT rate for carbon trading, while Holland transferred the obligation to pay VAT from the seller to the buyer.

``We saw big possibilities of fraud,'' with a potential loss of hundreds of thousands of euros, said Marcel Holman, a spokesman for the Dutch tax authorities. He declined to say whether the Finance Ministry's financial intelligence unit had actually uncovered a carousel fraud in operation.

The British Treasury also warned last month that Britain would become a major target of tax theft in carbon emissions permits in the next few months.

The London office of global accounting firm KPMG said suspicions of VAT fraud surfaced last May when the volume of carbon trade rose on the Paris BlueNext exchange from 27.2 million tons in October, spiking six months later at 186 million tons.

Andrei Marcu, a former head of BlueNext and former president of the Geneva-based International Emissions Trading Association, said the risk of fraud can be high in any new commodities market, and CO2 is no different in the need for high regulatory standards.

When the carbon market was getting started, big companies were involved and the traders knew each other, he said. But it has grown so fast that small unknown operators are now doing big business, making self-policing more difficult.

Marcu, now a consultant for a Canadian law firm, declined to comment on the specific activity at BlueNext.

A different set of problems threaten the trade in credits derived from halting deforestation.

Forests store vast amounts of carbon, and release it when trees are cut or burned. Scientists say deforestation contributes about 20 percent of all the carbon leeching into the atmosphere.

By measuring the amount of carbon held in a forested area, a value can be placed on that carbon and owners can be compensated for preserving them. Carbon offsets, purchased by airline passengers or concert-goers who voluntarily want to cut their carbon footprint or big corporations that need to meet emissions targets, buy the credits from the forest owner.

But shady brokers already are moving into this field. They persuade landowners, especially forest dwellers with little understanding of modern commerce, to sell a share of the rights to the carbon stored in their trees, counting on a hefty profits later.

``These carbon cowboys should be rounded up,'' says Kevin Conrad, the chief climate change negotiator for Papua New Guinea, a Pacific Ocean nation with hundreds of indigenous tribes living in its deep forests.

In July, the head of Papua New Guinea's Office of Climate Change and Environmental Sustainability, Theo Yasause, was suspended pending an investigation for allegedly issuing some 40 tons of carbon credits for preventing deforestation. Such credits do not yet exist for governments to sell since there is no mechanism in place to measure and verify that forests are being preserved.

U.N. talks aimed at a new global warming agreement in Copenhagen are seeking ways to scale up efforts to avoid deforestation to make it worthwhile for governments like Brazil or Papua New Guinea to save their rapidly depleting rain forests.

Negotiators are working on ways to verify that logging trends have been reversed, largely through satellite imagery, and on raising billions of dollars to compensate rain forest countries - with the carbon market as one possibility.

Conrad said the climate negotiators are trying to build safeguards into the Copenhagen climate agreement to limit the opportunity for criminals. Chief among them is postponing any payment for avoiding deforestation until inspectors verify that tree-cutting trends had been reversed.

Peter Younger, the Interpol officer who deals with environmental crime and wildlife smuggling, says illegal logging and tax fraud is bound to grow as the market expands.

``Given the interest already by criminal groups in illegal logging as a business in itself, if there is money to be made in carbon credits or tax evasion ... then somebody is going to get on board with this stuff,'' he said.

08/21/09 11:44 © Copyright The Associated Press. All rights reserved. The information contained In this news report may not be published, broadcast or otherwise distributed without the prior written authority of The Associated Press.