New Zealand cafes buying so-called compostable coffee cups are being "misled", in what could be a breach of the Fair Trading Act.

Dunedin City Council waste manager Catherine Irvine said polylactide (PLA) disposable coffee cup lids were being sold as compostable when there were no facilities in New Zealand capable of composting them.

As a result, well-meaning cafes across New Zealand are paying a premium for the lids in an attempt to "do the right thing" but the lids can't be recycled.

A spokeswoman for the Commerce Commission said companies selling the lids could be breaching the Fair Trading Act.

She pointed to a 2013 case in which a rubbish bag company was fined $60,000 for making misleading claims about its bags being biodegradable.