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Divided nation not yet 'supercharged' for climate race

Marion RaeAAP
Nickel miners are among those who could benefit from the production tax credits. (Marion Rae/AAP PHOTOS)
Camera IconNickel miners are among those who could benefit from the production tax credits. (Marion Rae/AAP PHOTOS) Credit: AAP

Tax breaks for making battery minerals and turning water into liquid hydrogen need ambitious climate targets for Australia to make a difference, advocates say.

The federal government must decide by 2025 on the next emission reduction milestone, amid hopes the following year will see Sydney co-host international climate negotiations with Pacific leaders.

"You do need a strong target for 2035 - that's what drives everything," Richie Merzian, international director at the Smart Energy Council, told AAP.

This week's federal budget was "a bit of relief" because it showed the government was willing to step in see how Australia could benefit from the transition, rather than be a victim to economic disruption as rival economies advance, Mr Merzian said.

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"It's not about picking winners. The world has picked winners - the world decided we're going to decarbonise, the world has decided we're going to net zero and we're going to triple renewables this decade," he said.

The Climate Change Authority might say the states and territories' actions get the nation to a 69 per cent reduction in emissions by 2035 and round it up to 70 per cent, but Australia should go harder than that, he warned.

Carbon Market Institute chief executive John Connor said the nearly $20 billion allocated in the 2024/25 budget would support investments in hydrogen, critical minerals, low-emissions agriculture and new rules for carbon storage.

But private capital could be "supercharged" by the forthcoming net zero plan - including strategies for each of the economy's biggest sectors - due out later this year, as well as stronger emission reduction targets for 2035, he said.

The federal budget included generous incentives to reshape the economy in a Future Made in Australia package to catch up with hundreds of billions of dollars being thrown at new clean industries in the United States.

Consultancy BDO said it understood the proposed production tax credits would be modelled on a US tax break, which offers a more generous credit of a quarter of the investment in advanced manufacturing facilities.

Lasting a decade, the $7 billion production incentive for critical minerals and rare earths would refund 10 per cent of the processing and refining costs.

It is designed to get projects over the line by making up for Australia's higher labour costs and red tape.

In Australia, companies would be able to access the tax credit from 2027/28 for costs that relate directly to the processing of hydrogen and 31 critical minerals including nickel, graphite, vanadium and lithium.

It was designed to encourage value-added processing - rather than upstream mining - and higher-value exports, Wilsons Advisory head of investment strategy David Cassidy said.

But the announcement was "incomplete" as legislation and regulations weren't finalised.

The efforts may come to nothing with the coalition adamantly opposed to the incentives.

In his budget reply speech, Opposition Leader Peter Dutton dismissed the production tax credits totalling $13.7 billion as "corporate welfare for billionaires".

Shadow Treasurer Angus Taylor declined to comment when asked if the coalition would repeal the Future Made in Australia package if elected in 2025, saying the party was yet to see the legislation.

Still, the spectre of sovereign risk hanging over the enterprise could stymie much-needed investment with commodity price volatility, high capital costs and approval delays already holding back investment decisions.

"We understand and respect that the opposition has a role to play in debating new ideas and new policy," Warren Pearce, chief executive of the Association of Mining and Exploration Companies, said.

"However, AMEC believes the (tax credits package) is a policy setting that will get Australia back in the game on a global stage, as other countries look to shore up their own supply chains ... this isn't just a handout to companies from the government."

Mr Pearce said it was a "no-risk policy" because if companies don't value-add to critical minerals and produce something, they don't receive anything.

An Australian vanadium company with an eye on future demand for its technology was one of the smaller developers that worked with the industry body on getting the tax incentives in the budget.

Vanadium flow batteries, whose underlying technology was developed in Australia, are a long-duration energy storage battery slated to play a key role in storing and time-shifting power produced from renewable sources.

Australian Vanadium CEO Graham Arvidson said the tax break would help stimulate investment in downstream projects and financially de-risk proposed plants, thereby making them more likely to get debt and equity funding.

This is an important factor for the critical minerals industry, where funding markets for many of these commodities are still developing.

For Australian Vanadium, the tax credit would apply at the stage of vanadium oxide production at a proposed processing plant and in the production of vanadium electrolyte at a manufacturing facility.

The company said it would help level the playing field with the US, which implemented its own tax credit regime as part of the Inflation Reduction Act and could help reduce capital flight from the Australian economy.

Because only one element is required to power a vanadium battery, it is highly feasible to have a sovereign battery supply chain entirely located in Australia.

This is not possible for a battery chemistry like lithium-ion, where China has the stranglehold.

Nickel hopeful Ardea Resources, which is working with long-term Japanese investors on the Kalgoorlie Nickel Project in Western Australia, also commended the green light for technologies needed to help lower the world's carbon emissions.

The Minerals Council of Australia said the budget "only scratches the surface" of what was needed to keep the industry competitive.

Chief executive Tania Constable said the company tax rate of 30 per cent dissuaded businesses from investing within Australia.

The mining industry contributed over half of the company tax collected from large companies in the budget.

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