What do the new tax credits for critical minerals and green hydrogen mean?

After months of wrangling, the federal government’s production tax credits for the green hydrogen and critical minerals sectors have passed the parliament.

This was one of the key planks of the government’s last budget, offering billions of dollars in support for both sectors.

The support is a bit unusual in its design — unlike the grants or loans that governments often hand out to support different industries, tax credits are paid after the product is delivered.

That way there is less risk that taxpayer funds are poured into projects that never eventuate.

The idea has been a bit politically sensitive.

The Coalition has criticised the support for the green hydrogen sector, arguing that for all the noise about green hydrogen, the industry is so far a fantasy that may never become a reality.

But the government has attacked the Coalition for opposing support for the critical minerals sector, pointing to the sectors’ repeated calls for this kind of support — and hoping the message cuts through in the resources-reliant state of WA.

Here’s a quick guide on how production tax credits are going to work.

Critical cash for critical minerals

For some time there has been a strong push for Australia to get more involved in processing and refining critical minerals, rather than just mining them.

While Australia is very good at mining critical minerals, most of the raw material is then sent offshore to be refined.

It’s seen as not just an economic problem, but a security issue too — given the bulk of the world’s rare earths are processed in China.

Production tax credits are designed to give the sector a bit of a leg up.

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Any company that refines any of the 31 minerals currently on the critical minerals list — like nickel, lithium, cobalt and manganese — is entitled to a tax credit to help cover their costs.

That tax credit will be 10 per cent of the cost of processing and refining the minerals, up to a certain level of purity.

It’s something parts of the resources sector have been seeking for quite some time.

The Association of Mining and Exploration Companies labelled the passage of the bill “monumental”, and expected it will “stimulate billions in new investment” in the sector.

The support is uncapped, but the budget estimated the cost at $7 billion “over the medium term”.

It is available from mid-2027, and can be claimed right until the end of the next decade.

Coalition points to alternative plans

When the production tax credit plans were first announced in the budget last year, the response from the Coalition was pretty swift.

“Fifteen billion for billionaires to dig minerals out of the ground,” was how Peter Dutton characterised it on ABC News Breakfast the morning after the budget.

And the Coalition has remained firm on that opposition since then, despite some pressure from parts of the resources sector.

The Coalition has pointed to problems with what it labels as the “fundamentals” as its priority in supporting the critical minerals sector.

That largely means industrial relations changes, which it argues have been doing damage to the sector.

WA Liberal senator Dean Smith made the case during debate in the Senate yesterday.

“I totally understand how industry is excited about a tax credit. Why wouldn’t they be? That is the normal style of operating a business when the government puts a lucrative financial offer in front of it,” he said.

“What we’re saying is that the approach is wrong because it doesn’t tackle — it doesn’t even seek to go near tackling — the key contributing factors to high project costs for manufacturing and minerals processing in this country.”

And the Nationals leader, David Littleproud, hinted at a policy pitch in the works from the Coalition in a press conference.

“We’ll be making an announcement, our own announcement, about where we think some opportunity lies,” he said.

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A path to a green ‘superpower’

The other big plank of the budget package last year was an estimated $6.7 billion in support for a new green hydrogen industry.

It would work in a very similar way to the critical minerals support — for every kilogram of green hydrogen produced in Australia, a $2 tax credit can be claimed.

Right now there is no green hydrogen being produced in Australia, and very little around the world, but the industry is hoping to scale up rapidly.

Green hydrogen can be used for a few different purposes, like helping decarbonise the steel industry, or being used to create green ammonia.

Dr Fiona Simon from the Australian Hydrogen Council said the tax credits will ‘keep Australia in the race’ on green hydrogen.

“There is no ‘do nothing option’ when it comes to hydrogen. We need it as a large-scale option for decarbonising energy that requires molecules, and we need it as a chemical solution to produce commodities like green iron,” she said.

“And we also need to remain a trusted energy partner across Asia and the export of molecules is critical to Australia’s ongoing prosperity.”

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While there have been hopes green hydrogen would help Australia become a renewable ‘superpower’, the industry has seen a few significant setbacks of late.

Energy giant Origin pulled out of plans for the country’s largest green hydrogen plant last year, and Fortescue pulled back on its ambitions for the sector a few months prior.

Just last week, the Queensland government pulled its support for a major hydrogen project in Gladstone.

The production tax credits model means that if the sector can’t get off the ground, the expected $6.7 billion in support will stay in taxpayer hands.

The government says the production tax credits are central to its vision of a ‘Future Made in Australia’ — but the billions in support it’s offering will only flow once that future starts being made.