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Indonesian plans to set up a carbon trading market potentially worth billions of dollars to protect rain forests may fail because of widespread corruption in its forestry sector, Human Rights Watch said on Tuesday.

Indonesia is seen as a key player in the fight against climate change given it still has huge swathes of carbon absorbing tropical forests.

But partly because of deforestation, a 2007 World Bank report put Indonesia as the world’s third-largest emitter of greenhouse gases and the country is under renewed scrutiny in the lead up to global climate talks in Copenhagen starting next week.

Indonesia could benefit from a United Nations-sponsored scheme called REDD, or Reduced Emissions from Deforestation and Degradation, under which poor nations earn money from carbon credits traded in exchange for the preservation of forests.

However, Human Rights Watch questioned in a report whether Indonesia could be a reliable carbon trading partner.

“In the absence of safeguards, the carbon finance market will simply inject more money into an already corrupt system, shortcutting needed reforms and exacerbating the situation,” it said.

There was a risk, for example, that because of corruption REDD project areas could be illegally logged, thereby rendering the carbon credits worthless, the report said.

The study, which looked at the forestry sector between 2003 and 2006, estimated Indonesia lost nearly $2 billion annually through unpaid royalties and taxes on timber, tax evasion by exporters and unacknowledged subsidies.

“Funds desperately needed for essential services that could help Indonesia meet its human rights obligations in areas such as health go instead into the pockets of timber executives and corrupt officials,” the report said.

World Bank health experts estimated the average annual loss of $2 billion would be sufficient to provide a package of basic health care benefits to 100 million of Indonesia’s poorest citizens for two years, the report said.

A spokesman for Indonesia’s Forestry Department said the government was serious about cracking down on illegal logging and said this was illustrated by a drop in the number of cases from 9,600 in 2004 to 200 in 2009 and just 45 in 2009.

“Many civil servants in both the central and regional governments have been disciplined or have even been subject to legal processes where there is evidence of involvement in illegal logging,” said the spokesman, Masyhud, who uses only one name.

“The government is deeply concerned about the economic losses, the damage to the environment and the preservation of the forest as well as the problem of moral hazard.”

The report recommended Indonesia’s Corruption Eradication Commission (KPK) should be strengthened and banks should be pressed to reveal their customers and monitor suspicious transfers, particularly if they involved senior forestry and administration officials.

Data on the amount of timber logged should be more carefully compiled and made public, while other countries should pass laws requiring documentation proving timber is legal, it said.

The report can be found at www.hrw.org/en/node/86705.

Reuters