Tens of millions of dollars that could be used to prevent plastic pollution are being misused, Port Stephens MP Kate Washington says.
Ms Washington, the NSW Shadow Minister for the Environment, said this money should be used to invest in the so-called "circular economy".
Amid a worldwide crisis in recycling, there's a strong push in Australia for governments to invest in this type of economy.
It would mean the waste collected in yellow-lidded bins in the Hunter and elsewhere would be recycled and reused in Australia, rather than being sent overseas - often to Third World countries.
At present, councils don't know precisely where this type of waste ends up because they don't track it.
Greenpeace says much of it ends up in landfill, being burned, or dumped into waterways and the ocean.
Ms Washington said the NSW government's notorious waste levy should be used to help "create the circular economy".
She said the NSW government collects about $750 million to $800 million a year through its waste levy, which is applied to landfill material by weight and levied against councils which pass the cost on to ratepayers.
The aim of the levy was to discourage landfill and support recycling programs.
But Ms Washington said the levy had become "a general tax, with at least two-thirds going straight into consolidated revenue".
"This money is being wasted. The whole system is a mess."
The NSW Government has allocated $802 million over nine years for its Waste Less, Recycle More program.
Ms Washington said industry could create a system that gets "close to that circular economy".
"We've got the technology, the industry is ready, willing and able, we just need some support from government."
The circular economy would ensure Australia does its part to reduce plastic pollution, amid rising global concern about Western countries using the Third World as a garbage tip.
This concern prompted Prime Minister Scott Morrison to state recently that some of Australia's plastic exported to Asia ends up in rivers and the Pacific Ocean.
Mr Morrison said only 12 per cent of Australia's plastic waste was recycled, mostly overseas.
Greenpeace said only 9 per cent of plastic waste was recycled worldwide, 12 per cent was incinerated and 79 per cent was dumped in landfills or the environment.
A meeting of federal, state and territory environment ministers was held in Adelaide last Friday.
The ministers set a timetable for the progressive phase out of "problem waste exports" from July next year.
They also committed to waste reduction targets under a new National Waste Action Plan. The ministers agreed that plastic, paper, glass and tyre waste that had not been processed into "value-added material" should be subject to the export ban.
The ban applies to waste glass by July next year, mixed plastics by July 2021, whole tyres by December 2021 and mixed paper and cardboard by no later than June 2022.
The plan has been criticised as destined to fail unless it is backed by hundreds of millions of dollars in funding and adequate legislation.
The Victorian government said it was investing $135 million in the sector. It wants the federal government to contribute, but federal environment minister Sussan Ley said the ban would "not be achieved through "government grants and too much regulation".
There are concerns that a recycling industry in Australia won't be viable because of competition with cheaper imports and lower wages in places such as Asia.
The Waste Management and Resource Recovery Association of Australia said a ban on waste exports should be matched "with a ban on packaging imports".
The association questioned how a ban on waste exports could work without a requirement that producers "take responsibility for products they design and create throughout their lifecycles".
"For the export ban to work, producers of goods, particularly packaging such as paper and mixed plastics - which is the main focus of the ban - need to contribute to the costs of managing their materials."
The Australian Packaging Covenant Organisation told the ABC that "we live in a capitalist society" and the recycling market was "driven by supply and demand".
The ministers have vowed to boost demand through "significant increases" in governments buying recycled materials for building and infrastructure projects.