Firefighters battled a blaze at the Hume facility that started late on Monday night and raged through to the early hours of Tuesday morning.
The facility holds about 150 tonnes of waste including cardboard, plastic and glass.
While the fire's under control, it is expected to burn for several days.
ACT Transport Minister Chris Steel said due to the damage, the facility was a write-off and would need to be completely reconstructed.
"The destruction of this facility is a significant setback for recycling in the ACT but also for six regional councils in NSW that send their material here to be processed," he told reporters.
"This will mean that we will need to transport recycled material interstate to another facility and we're looking at what options there are to take the almost 60,000 tonnes per annum of material."
The territory government had planned a second facility to be operational by 2024 but Mr Steel said it would now look to potentially expedite that build.
While the cause of the blaze is still unknown, ACT Fire and Rescue chief Matthew Mavity said an incorrectly recycled battery or vape had not been ruled out.
"Any battery ... has potential chemical energy stored and that can be released if it's damaged," he said.
"We're not ruling anything out and an investigation will get as close as we can to the cause and origin."
Mr Steel said it was a timely reminder for people to make sure they recycled safe materials.
"Unfortunately, we do see too many dangerous objects put into the recycling stream that simply shouldn't be there," he said.
"Things like vapes, batteries and even gas cylinders that can cause a hazard and a risk of fire."
People have been asked to avoid the area surrounding the facility at John Cory Road.
ACT residents were encouraged to keep recycling and putting their bins out as normal.
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