Ms Smith was giving evidence in the final session of the House of Commons Northern Ireland Affairs Committee’s inquiry into the implementation of the province’s waste management strategy.
Calls for such an agency date back 15 years - but have been blocked by the Government to protect the public Water Service, one of the province’s main polluters.
Ms Smith said she was "quite sympathetic to the idea", but warned that any decision by a direct rule Minister could "tie the hands" of a devolved administration.
Describing the cross-border dumping of waste as her top priority in waste management, she said that the Government is looking at the introduction of new powers to allow the regulatory authorities to seize vehicles involved.
She admitted that the administration’s waste management industry fund "has not been as successful as we would have liked", and said WRAP offered greater potential to develop markets for recycled materials. WRAP is conducting a study into the feasibility of a paper mill that would use scrap paper as feedstock. The organisation says the mill would be located "on the island of Ireland" but Ms Smith said the Department of the Environment was looking at "a Northern Ireland paper mill".