The next federal government has been urged to review the carbon market as experts question the integrity of credits used by companies to balance their books on emissions.
A research report, launched by an independent think tank on Thursday at an energy expo, outlines the risks of relying on the $4.5 billion Emissions Reduction Fund as a short cut to net zero targets.
But the coalition insists Australia's carbon market is "going from strength to strength" and has accused Labor of introducing a "carbon tax by stealth" by planning to change arrangements if elected.
The Australia Institute report found the scheme was never designed to carry the full weight of Australia's climate policy and is "crumbling under the pressure".
"Given the increasing focus on greenwashing at the national and international levels, businesses face reputational, financial and legal risks for not achieving their climate change commitments," the report said.
The fund will remain the key pillar of the coalition's emissions reduction approach, particularly in agriculture and the resources sector.
"We'll continue to invest to ensure that we maintain the integrity of the ERF scheme as we expand the number of eligible activities and methods and grow supply," a spokesman for energy minister Angus Taylor told AAP.
The energy minister's department has also been working on incentives for Australia's biggest companies to get pollution below current baseline limits, to avoid failure on achieving net zero emissions by 2050.
The existing safeguard mechanism and the fund are part of a framework for Australia's largest emitters to measure, report and earn or buy carbon credits for projects that abate emissions.
While the voluntary carbon market is open to all, the safeguard mechanism applies to the biggest greenhouse gas emitters across industry, manufacturing, mining, oil and gas, and transport.
Labor energy and climate spokesman Chris Bowen plans to tighten company emissions levels, pushing them to do more or pay a penalty if tougher baselines are breached, and introduce a new carbon credit.
It's "absurd" to call the proposal a tax, he told the Smart Energy Council expo.
In contrast, the coalition's planned safeguard crediting mechanism would pay companies to use new technologies to cut more emissions than required under the baselines.
Last year's budget set aside $279.9 million over 10 years to allow the regulator to pay businesses under the new tool, and legislation is in the works for 2022 if the government is re-elected.
Labor will do a short review, if elected, following claims by ex-chair of the federal emissions reduction assurance committee Andrew Macintosh that Australian carbon credits are a "fraud on the environment".
Professor Macintosh's research earlier this year found up to 80 per cent of the units do not represent new or real cuts, and major emission reduction methods are flawed in design or the way they are administered.
The Australia Institute wants a comprehensive review, free of vested interests, after research showed business, traders and carbon-farmers have too much influence.
The regulator stands by the arrangements and is still assessing the claims.
State governments also support the ERF and are expanding carbon farming.
Skipp Williamson, head of consultancy firm Partners in Performance said using carbon credits has often been criticised as a way for companies to demonstrate "green credentials" without changing their business model.
"While many businesses may have bought into carbon credits in good faith, it's time to question the impact of these programs," she said.
Emissions covered by the mechanism are up 7 per cent since 2016, and are projected to rise under current settings.
