A world-first trial to use brown coal to make hydrogen has been launched in Victoria's east as a pilot 'clean energy' project that is expected to create 400 jobs — but critics and coal industry experts alike said new measures will be needed to tackle the carbon emissions generated.

A demonstration plant will be built in the Latrobe Valley as part of the $496 million project to develop technology to produce hydrogen from the region's vast reserves of coal.

The hydrogen would be shipped from the Port of Hastings to Japan under the deal with Kawasaki Heavy Industries, J-Power, Iwatani Corporation, Marubeni and the Japanese Government.

The Federal and Victorian Governments are providing $100 million towards the cost of the trial.

Speaking from the launch at Loy Yang mine, Prime Minister Malcolm Turnbull said hydrogen was a fuel of the future.

"This project will ensure there are more jobs for Latrobe Valley workers not just today, but in years and decades to come," Mr Turnbull said.

"It is critically important that we invest in energy sources of the future and that we affect the transition from older forms of [energy] generation to new forms of generation and we do so seamlessly."

"This is about new technology, partnering with the Japanese to come up with not only carbon capture and storage, but a way of converting this into hydrogen and making it a fuel of the future," Federal Treasurer Scott Morrison said.

Coal jobs

Prime Minister Malcolm Turnbull launched the hydrogen trial at Loy Yang in Victoria's east. ( ABC Gippsland: Emma Field )

About 400 jobs are expected to be created during the construction of the demonstration plant at AGL's Loy Yang power station and mine near Traralgon.

The jobs are a welcome boost to the region, still grappling with the closure of the Hazelwood power station a year ago.

"We've got $100 million going to that project over the next four years, we're investing in jobs in the Latrobe Valley," Mr Morrison said.

Victoria's Regional Development Minister Jaala Pulford said the trial was a world-first.

"Hydrogen can be used for transport, fuel cells which operate like large scale portable batteries and power generation."

Ms Pulford said the industry represented a huge opportunity, as Japan moved to convert all cars to hydrogen.

"Analysis shows that as demand for this type of clean energy grows, this industry will be worth $2.5 trillion by 2050," Ms Pulford said.

Bass Strait carbon storage

A way of capturing and storing the carbon emissions would need to be developed.

Coal Innovation Australia said the pilot plant was the result of up to 10 years' work.

"Converting brown coal through high temperature processes does generate a lot of CO2, I don't think anyone would deny that," Brian Davey of Coal Innovation Australia, said.

Kawasaki Heavy Industries said developing a carbon capture and storage system for the emissions was critical to the commercialisation of the technology.

"Victoria is blessed with absolutely world class storage capability in Bass Strait, so we have a huge natural resource in terms of the brown coal which is low cost, and we've got a huge reservoir for storage of CO2," Mr Davey said.

Environment Victoria said any pilot plant should have carbon capture and storage technology from the start.

"For this to be a viable process, carbon capture and storage should be part of the trial from the get go," Environment Victoria Campaigns Manager Nicholas Aberle said.

In February, the Victorian Government completed seismic testing off the coast of Golden Beach in Gippsland.

The tests determined whether dried up oil wells in the Gippsland Basin, previously used by Exxon Mobil, were suitable for storing carbon piped from the Latrobe Valley.

"There's a broader concern that this is going to be another failed coal project in a long line of failed coal projects in the Latrobe Valley that continue to distract us from focussing on real diversification in the valley," Mr Aberle said.

Federal member for Gippsland Darren Chester said he was hopeful the technology proved commercially viable.

"The former member for Gippsland South Peter Ryan went to Japan five years ago to discuss this technology with the Japanese Government and Japanese industries," Mr Chester said.

"I'm of the view that the lignite we have available to us is an outstanding natural resource and I think applying new technologies and new uses for the resource is what we should be doing," he said.

The $90 million government-funded Advanced Lignite Demonstration program announced in 2012 failed to find alternative uses for brown coal and failed when two of the three projects were shelved

Construction of the demonstration plant will begin mid-year for completion by 2021.