Australia's Environment Department says an audit of houses insulated under a government rebate scheme has found substandard insulation was installed in 16% of cases.
In addition, 8% of cases failed safety standards.
With one million homes insulated under the programme, that is potentially 160,000 homes with inferior insulation.
Federal Environment Minister Peter Garrett has axed the $A2.5 billion insulation scheme, along with the solar hot water programme.
Environment Department secretary Robyn Kruk said the decision to scrap the programmes was based on problems revealed in the audit.
The ABC reports the insulation scheme was plagued with problems including the deaths of four tradesmen and nearly 90 house fires.
Federal Opposition Leader Tony Abbott has called for Mr Garrett to resign over the bungle.
Last week, Mr Garrett suspended the use of foil insulation and recently suspended a Queensland company amid concerns about its accreditation to operate under the scheme.
Mr Garrett revealed on Friday that the axed initiatives would be replaced by a renewable energy bonus scheme.
The new scheme will provide rebates of up to $A1000 for the installation of ceiling insulation or a solar hot water system, compared to the $A1200 rebate that currently goes to installers.
Home owners will be able to claim the rebate through the Medicare system rather than installers claiming it directly.
There will also be much tougher rules and more checks for installers.
The ABC reports the new scheme is expected to be in place in a few months.