THE Commonwealth will review its carbon credit scheme following the damning allegations of a whistleblower, who claimed 80 per cent of government-backed credits were "fraudulent".
Energy and Climate Change Minister Chris Bowen on Friday announced the review, which will be led by former chief scientist Professor Ian Chubb.
A panel of four experts will review the scheme after experts questioned the integrity of credits used by companies to balance their books on emissions.
The review delivers on an election promise following claims by an 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 published 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.
"Concerns have been raised recently about several aspects of Australia's carbon crediting system, including the integrity of its key methods and the Australian carbon credit units issued under it," Mr Bowen said.
"The government wants to make sure it remains a strong and credible scheme supported by participants, purchasers and the broader community."
The panel will undertake a six-month review of the scheme and is expected to provide a report and recommendations to the government by the end of the year.
The review was welcomed by The Australia Institute, who along with Prof Macintosh called out the poor regulation and ineffectiveness of the scheme.
"Carbon credits with integrity can play a role in Australia's net zero future, but dodgy credits that are not additional or real abatement are effectively a licence to pollute and are only further fuelling climate change," TAI climate director Richie Merzian said.
"To be a legitimate climate policy the ERF must do as its name suggests: reduce emissions.
"At least $1.5 billion in public funds have been committed to purchasing carbon credits that could be hot air - that is not representing real or additional cuts in emissions."
Carbon Market Institute chief executive John Connor said the market was on the cusp of a historic shift from taxpayer-funded crediting scheme to one primarily driven by the private sector, as it takes up demand for greater climate obligations.
"However, for the market to serve its purpose of driving real and additional emissions reductions and removals, and directing finance to where it's most needed, the priority must be to make sure our carbon credits and their governance are fit for purpose," Mr Connor said.
*With Australian Associated Press