Businesses are overstating over how much plastic, paper and cardboard they recycle in wake of a ban on sending it to China, MPs fear.
Concerns are mounting that an increasing proportion of waste set aside for recycling is being thrown into the sea because it can no longer be shipped abroad.
China, formerly the world's biggest importer of recycling waste, closed its doors in January resulting in rubbish building up at UK shipping ports.
Following the ban as much as 100 per cent of businesses and councils' "recycling waste" may end up not be recycled, sources said, as around a million extra tonnes of waste a year will remain on UK shores.
UK firms handling packaging must take part in a "Packaging Recovery Note" scheme which ensures that a certain proportion of waste is recycled under the scheme.
They meet these obligations by buying recovery notes from recycling companies in the UK, or from companies that export waste for recycling abroad.
But despite the alleged reduction in recycling companies are still receiving kickbacks and credit notes on the basis that most of the waste they hand over is recycled.
Today MPs on the Environmental Audit Committee are warning that the system is open to "fraud and non-compliance", and have asked Government mathematicians in the National Audit Office to conduct an urgent review to establish whether it should be reformed.
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An industry source said: "For ten years or so recycling rates have been going up but it was all under the guise of how much was being handed over, not what was actually being recycled.
"Now that China won't accept any its possible that for some smaller companies up to 100 per cent of recyclable waste isn't being recycled. The system needs to change so that businesses have to report on how much is actually recycled. If manufacturers paid for packaging upfront that would be better, but most are very resistant to the idea."
Mary Creagh, chair of the Environmental Audit Committee, said: “Packaging waste is contributing to the ever-growing levels of plastic pollution in the UK and abroad. Packaging Recovery Notes are intended to make companies do their bit for recycling, but there is significant concern that they are distorting the market in favour of exports rather than reprocessing in the UK.
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"The NAO review will give my Committee an insight into the effectiveness of the PRN system, enabling us to assess whether the Government is taking the right action to ensure high levels of recycling in the UK.”
It came as the Government responded the the Committee's inquiry into reducing waste from packaging, in which it promised no effective action on UK’s mountain of coffee cup waste.
A Government spokesman said: “Industry has a crucial role to play in making more products recyclable and we are working with them to reform our packaging waste regulations so producers are incentivised to take greater responsibility for the environmental impact of their products.
“But it is wrong to say government is not taking decisive action - we have set out our commitment to the environment in our 25 year plan, published in January, and we are looking at further ways to reduce avoidable waste and recycle more as part of our resources and waste strategy."