At least 500 villagers, mostly in Oro province on the northwest coast, have paid upwards of $400 to register as shareholders in a carbon-trading company.

They are lured by the con men with promises to hand out big returns on the investment, according to Australian national media group Associated Australian Newspapers, which investigated claims by a forestry insider.

A spokesperson for the Papua New Guinea prime minister said the irregularities would be looked into.

The Papua New Guinea issue highlights problems encountered by many developing countries in setting up carbon-trading schemes to reduce their CO2 emissions.

Pollution-emitting companies, mostly large manufacturing businesses in steel and chemical sectors, will be allowed to pollute up to a maximum level annually. If they dump greenhouse gases into the atmosphere past their limit, they must buy so-called carbon credits that amount to the total of over-pollution.

Failure to buy enough credits to cover their over-pollution leaves the businesses open to hefty fines, depending on their government's regulations if they exist.

Firms can also reduce pollution levels below their limit, giving them credits to sell on the open carbon-trading market to over-polluters. Or they can be given carbon credits based on their investment in overseas projects, many in developing countries, that purportedly reduce carbon emissions in those countries.

But the unregulated business of carbon trading is becoming "emission impossible," environmental pressure group WWF has said.

International standards for quantifying pollution levels and monitoring them are still being set up.

European companies, under The European Emissions Trading Scheme, can meet their commitments to cut greenhouse gas emissions by investing in projects in the developing world. But the WWF has called these projects such as hydro dams dubious reducers of CO2 gases.

WWF spokesman Dave Melick has called the carbon credits "sky money" because many have no value to back them up until a market is established.

The London-based Economist magazine has reported concerns over Papua New Guinea's Office of Climate Change. The magazine claims it has been offering millions of dollars worth of carbon credits while no legislation or policy exists in the country or under U.N. guidelines.

Despite a lack of legal rules in many developing countries, Western firms are signing deals with governments to map out trading platforms.

BlueNext, Europe's largest carbon credit exchange, announced this month that it has agreed to work with China Beijing Environmental Exchange to establish a trading platform for Chinese carbon credits.

BlueNext said it hopes its work will lead to a joint venture that would operate a new carbon exchange in China.

The CBEE was established in 2008 to develop a platform to trade emission quotas but has not started operations yet.

China, similarly to Papua New Guinea, has no legal framework for carbon trading, although small regional trials are operating.

Chicago Climate Exchange entered into an agreement with China National Petroleum Corp, the country's largest oil and gas producer, to set up the Tianjin Climate Exchange.

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