Papua New Guinea's Prime Minister Sir Michael Somare said a formal investigation has been established to review all aspects of policy, financial and human resources in the Office of Climate Change and Environment Sustainability.
The newspaper, The National, reports that Sir Michael made the statement to Parliament in response to allegations of impropriety raised by both Opposition leader Sir Mekere Morauta and Eastern Highlands Governor Malcolm Kela-Smith.
The formal investigation is to be undertaken by the Department of Personnel Management.
The Office of Climate Change is alleged to have issued carbon trading certificates to international brokers, in the absence of national legislation, and to have misappropriated carbon deal funds that were meant for landowners.
Sir Michael said when it came to climate change finance, neither domestic stakeholders nor the international community would permit all climate change funds to be paid to consolidated revenues as the leader of the Opposition had proposed along with certain governors.
PNG leads a Coalition of Rainforest Nations that is advocating an initiative for industrialised countries to pay them to keep their forests for greenhouse emissions absorption.
But international conservation groups say illegal and destructive logging continues in the country.