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.
Carbon credits have a role to play in reducing emissions in genuinely hard-to-abate areas of the economy, such as agriculture, steel and cement, according to Ben Oquist, head of the Australia Institute.
"But dodgy credits used as offsets are effectively a licence to pollute, fuelling climate change," he said.
The report finds fossil fuel and carbon-farming bosses have too much influence in what is approved.
The Australia Institute calls for an independent review of governance and integrity of the voluntary carbon market, and how the arrangements work alongside other climate policy levers.
Labor pledged a review, if elected, following claims in March 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 findings 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 Clean Energy Regulator stands by the arrangements and is working closely with the Australian Competition and Consumer Commission and Australian Securities and Investments Commission, which will act against companies touting sham carbon products.
Energy Minister Angus Taylor has said he wants "the broadest source of crediting under the ERF as we possibly can" to include as many technologies as possible to drive down emissions.
State governments also support the ERF and are expanding carbon farming.
But the Australia Institute says the tool 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.
Skipp Williamson, managing director 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.
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