According to folk tales, the gate of hell opens annually during this time -- the seventh month on the lunar calendar which this year falls in August, letting its dwellers come to the human world to feast.
But as concerns about the environment and global warming grow, authorities and religious groups are calling for a change to the old ways of worshipping.
"We can't ban a folk belief but we hope to change how it is practised to ease pollution and eventually to phase the habit out," said Hui-chuan, an official of the Environmental Protection Administration (EPA).
Studies have found that burning one tonne of paper money releases at least an equal amount of carbon dioxide, one of the main gases held responsible for global climate change, and other wastes including benzene, methylbenzene and ethylbenzene -- which could cause cancer and other diseases.
Burning incense sticks also produces methylbenzene and other hazardous chemicals.
The "Ghost Month" festivities peaked on the 15th day, or the "Ghost Festival," which is known as Chungyuan to Taoists or Ullambana to Buddhists, in tens of thousands of temples across the island.
The two faiths are pre-dominant in Taiwan, with seven to eight million believers each in a population of 23 million.
On the 15th day, faithfuls thronged temples to pay their respects and give offerings to the spirits, and many continue to do so here. Some temples held parades and a special ritual called "grappling with the ghosts" with participants climbing a high pole smeared with butter. In the old days the fastest climber took home the offerings for food and now cash prizes.
In some port cities, the festival is marked by setting ablaze paper lanterns in the shape of a house or lotus carrying paper money to the sea to appease the drowned.
There is no data on the amount of paper money burnt annually, but last year Taiwan manufactured 113,000 tonnes of the offering, with a small piece of gold or silver foil glued to the centre, for religious and funerary purposes, according to the EPA.
"Burning paper money not only pollutes the air and affects people's health, but causes so many trees to be cut down," said Hsiao, head of the EPA's department of air quality protection.
Environmental agencies are urging people to use fewer incense sticks and are offering to collect the paper money from households and temples to burn in state incinerators that can treat the exhaust.
Monks are also hired to perform rituals to "cleanse" the incinerators normally used for disposing of garbage to put the faithful at ease that the spirits are being respected.
The popular Long Shan Temple in Taipei, which enshrines Buddhism and Taoism deities, was among the first to endorse the initiative.
"In the past, we burnt several truckloads of paper money brought by our followers in 'Ghost Month.' The stoves cracked after burning non-stop and the smoke was terrible," said Chang Chun-hung, a spokesman for the temple.
Paper money is no longer used in the temple, which now sends a small van of paper money -- from those who cling to the old rite -- to environmental authorities for disposal.
"It is difficult to stop an age-old custom but gradually our followers are accepting the change and use less paper money," he said.
Some religious groups, notably the Buddhist charity and environmental foundation Tzu Chi, encourage their members to donate the money meant for offerings to those in need.
Tzu Chi, which has made "saving energy, lowering carbon emissions" one of its mottos in recent years, called for a complete stop to burning paper money and killing animals in worship rituals.
"We believe that if a person is sincere, his or her prayers will be answered without such offerings," said spokesman Charlie Ke.