An Australian coal-fired power station plans to use greenhouse gas emissions to generate biofuels.

Australian biofuel company Algae.Tec has signed a deal with power company Macquarie Generation, owned by the New South Wales government, to set up a carbon capture and biofuels production plant next to Macquarie's Bayswater power station, in the Hunter Valley, north of Sydney.

"This deal is an innovative means of capturing and reusing carbon emissions and providing the Hunter [Valley] region with a locally produced green fuel source," said New South Wales Energy Minister Chris Hartcher in a statement.

The system will feed waste carbon dioxide from the power plant into enclosed algae tanks, where the algae consume the waste. The resulting algal oil is then converted to biodiesel and grade A jet fuel.

"Once this formula is established there is no reason why we can't expand it in Australia and get involved in an expansive development in North America and Europe, particularly the U.K.," Algae.Tec Executive Chairman Roger Stroud told Bloomberg, adding the company is also in talks with Brazil.

The 2,640 megawatt Bayswater power plant, considered a centerpiece of New South Wales' energy system, uses about 7.5 million tons of coal a year to supply power to eastern Australia, South Australia and Northern Queensland.

Australia is considered one of the largest emitters of CO2 emissions globally on a on a per-capita basis due to its heavy reliance on coal for electricity production.

Australia's carbon tax for big polluters rose to $22.27 a ton Monday from the previous rate of $20.87, following a scheduled increase.

"Carbon is now our single largest cost," said Russell Skelton, Macquarie Generation's Chief Executive and Managing Director, in a statement.

"This technology should reduce our carbon output, reduce our carbon bill and at the same time improve our bottom line."

The first stage of the Algae.Tec facility is expected to use 250,000 tons of CO2 a year, the Newcastle Herald reported, which could save Macquarie Generation about $5 million a year in carbon taxes.

"At a time when all the petroleum refining capacity is closing down in New South Wales, this is the beginning of an era of renewable fuel which can be 'grown' and can substitute imported petroleum products," Algae.Tec's Stroud said in a statement.

Competition from cheaper mega-refineries in Asia has transformed Australia from an exporter to importer of liquid fuels. After the scheduled closure next year of Caltex's Kurnell refinery, Australia's refining capacity will have been cut 28 percent, and the closure of Shell's Geelong plant, announced in April, will reduce that capacity by another one-fifth.