PIP COURTNEY, PRESENTER: The Department of Climate Change and Renewable Energy estimates there's been a drop of almost 9 per cent in emissions from Australian power stations since the introduction of carbon pricing.

But if a pilot scheme in Queensland using microscopic algae that eat greenhouse gases is fully commercialised, those harmful emissions could be slashed in half.

The hungry algae have excited scientists and big electricity generators alike, because apart from producing a range of useful by-products such as biodiesel and stock feed, the concept has the potential to generate jobs and new businesses in rural and regional areas.

There have been a host of suggestions as to how Australia can cut its greenhouse gas emissions - a livestock fart tax, replacing sheep and cattle with kangaroos and injecting CO2 underground.

And then there's the idea of getting pond scum, or algae, to gobble up carbon. In fact around the globe, algae's become the focus of an extraordinary research effort.

KIRSTEN HEIMANN, JAMES COOK UNIVERSITY: Very heavy funding in the range of billions of dollars is made available in the United States and in Europe for biofuel production from microalgae in particular.

PIP COURTNEY: Algae's high oil content drove a big research push in the '70s, but when oil prices stabilised, interest waned. Now, four decades on, the search for alternative fuels, coupled with algae's carbon-eating talent, has piqued interest among a whole new generation of boffins.

Are you excited that algae is getting so much attention?

KIRSTEN HEIMANN: I'm over the moon, I have to say, because I've done this research for more than 25 years, I've played with my little pets for so long, but every time I talk with people and they said, "Well what's the significance of this?" they said, "Yes, so ...?. No-one really got interested, no-one really wanted to do it.

Funding was extremely hard to get because they all looked at the algae as being weird organisms and you didn't get money for doing weird things. So now the platform has changed completely. The importance of the primary organism that reduces CO2 and produces valuable compounds has risen.

PIP COURTNEY: Dr Heinmann's team, which has grown to over 40, caught the attention of former Queensland premier Anna Bligh.

ANNA BLIGH, FORMER QLD PREMIER: This is extraordinary work. I have always been intrigued by this project and am a great enthusiast for it and am very excited about the fact that it's happening here.

PIP COURTNEY: A $160,000 State Government grant helped build this demonstration site at JCU.

ANNA BLIGH: This research has the capacity to change the face of energy use, and not only here in Queensland and Australia, but around the world. Today, this project moves out of the lab and into the first stage of commercial development. It's a number of years away from mass commercial scale, but it takes a very important step into the commercial world today with the opening of its next facility.

This is the sort of project we as a government intend to get behind because this helps us not only with our environment, but potentially it helps make coal a much more environmentally friendly source of fuel and that's good for all of the Queensland economy and environment.

PIP COURTNEY: The algae project then ratcheted up a gear when big energy players invested in MBD.

TONY ST CLAIR, MDB ENERGY: We've had three of the major power companies, Loy Yang brown coal, Eraring and Tarong, both black coal, make choices to come and go algal farming with us. And beside that we've had Anglo American coal become a cornerstone investor. So we've got some pretty big players sitting out there that are coming alongside. We've got a lot of the coal seam gas people talking to us as well.

PIP COURTNEY: It's been a long time coming, but recently, investors were finally able to see what an algal synthesiser looked like and to see it running at a real power station.

ANDREW LAWSON, MBD ENERGY: It's very exciting to get it up and running at the power station. I think it's very true saying sort of five steps forward and three steps back and so it's - we're still learning a lot, but we're really keen to then look at how we can scale it up and make a difference here.

PIP COURTNEY: So far MBD spent $30 million on algal research.

JERRY ELLIS, MDB ENERGY: I don't know that we're leading the world, but I think we are the first to couple to a power station, I think that's a first, and what we're learning here in terms of the practicalities of that is no doubt leading the world.

PIP COURTNEY: It might be a pilot plant, but carbon abatement's already begun. Instead of going into the atmosphere, about 1 per cent of the Tarong's power station CO2 is being injected into algae ponds.

A full-scale algal synthesiser would stop half of the power station's CO2 from going into the atmosphere.

ANDREW LAWSON: I think that, you know, the upper limit of where we can take this because the algae only grow during the day is really, you know, to 40 or 50 per cent reduction in flu gas. So I think that that will bring it down below the levels of CO2 emitted in gas-fired power stations.

PIP COURTNEY: MBD's chairman Jerry Ellis knows a thing or two about big energy bills and risk. He's a former ANZ bank director and BHP CEO and chairman.

JERRY ELLIS: There's a risk in any venture, but the beauty of this particular venture is that pretty much everyone likes it. It consumes a waste product to produce a useful product. It cleans up people's messes and we hope it'll make money one day.

PIP COURTNEY: But cutting emissions is just part of what algae farming offers. Because when they're done chowing down on CO2, algae can be turned into an extraordinary range of products.

KIRSTEN HEIMANN: Pharmaceuticals, nutraceuticals, it's a never-ending story. Bioplastics - you name it, you can all derive that from microalgae.

PIP COURTNEY: MBD was first attracted to algae because of its potential to replace fossil fuels. It believes algae's a better biofuel than food crops as it doesn't need good land or clean water.

TONY ST CLAIR: We can produce more off 200 hectares than you can off 700,000 hectares of corn. So those sort of numbers are pretty compelling. But at the end of the day, we want rubbish land, there's buffer lands around most of the power companies and we'll go produce out beyond that.

PIP COURTNEY: Biofuels is an expensive investment, so in the short term, MBD's focusing on more modest diversification proposals like stock feed and fish oil.

Researchers are excited algae could be a replacement source for omega threes for both human consumption and use in the aquaculture industry. It's potentially a massive market, with Europe alone investing $100 million in the search for fish oil alternatives.

TONY PARKER, JAMES COOK UNIVERSITY: Now one of the great things about the microalgal story is that it's fish oil without going through the fish, so it saves all that energy through the feed chain and we're not relying on a marine environment. We can do that in house, in tubs, in bladders beside power stations to produce the same thing.

PIP COURTNEY: It all sounds great in theory, but the stumbling block is harvesting.

KIRSTEN HEIMANN: Because they are very small. Most of them are only - not even a pin prick. They're 0.005 millimetre in diameter, extremely small. And of course gravity doesn't work terribly well on such small things. So we are investigating whether we can co-culture them or whatever else we can do to improve the harvestability.

PIP COURTNEY: Fish food too is a potential market.

ANDREW LAWSON: You can get about 9.5 out of the 10 essential amino acids in the protein for fish meals and so there's some really highly nutritious aspects to it. I think fish meals sort of range been $1,500 and $2,000 a tonne. We have to make sure the algae component of that sits in that price range with the cattle feed and so forth.

PIP COURTNEY: Tests are being done on feed for cattle, pigs, poultry, and most recently, lambs.

Dr Tony Parker's been testing an algal meal on cattle, but initial results have been mixed.

TONY PARKER: Not that good at the moment. To be quite honest, the animals like the taste of it, they'll hook into the feed, but after a number of weeks they start to pull back on the dry matter intake.

PIP COURTNEY: What do you think the reason for that is?

TONY PARKER: I think it's probably due to the fact that it's a marine algae and has high levels of iodine in it.

PIP COURTNEY: Dr Parker predicts feed made from fresh water algae will taste better and be higher in protein and fat. He even thinks farmers could one day run their own algae farms.

TONY PARKER: You could probably see dairy farmers utilising their effluent streams to provide a nutrient source to algae to produce a dried protein source to either be fed back through the herd or to be on-sold to other animal industries.

PIP COURTNEY: Major Australian stock feed company Ridley is involved with the research.

ANDREW LAWSON: We really just had a long two-year trial system with Ridley. We're now looking at - and that's been predominantly with cattle blocks.

PIP COURTNEY: MBD says if the algae synthesiser can economically reduce CO2 emissions from Australia's coal-fired power stations, then the regions where they're sited stand to gain new investment, new industries and jobs.

ANDREW LAWSON: I mean, there's huge investment in the existing infrastructure and so if we can make it a cleaner infrastructure and get these products out, it's really only going to benefit those regional centres in which all these facilities sit.

PIP COURTNEY: A lot has to go right before power stations have algae farms next door and stock feed and fish oil operations nearby, so Jerry Ellis is wary about making big pronouncements about algae. He says at the moment MBD's focus is using algae to clean up water at prawn farms and coal mines.

JERRY ELLIS: We have two projects that look as if they could bring in some early cash flow. One is cleaning out some highly nutrient water that's going into the ocean that we can remove the nutrients, producing an algae that we can sell, and we're very close to trialing that in the market. That's a food market, so that's pretty touchy stuff in terms of quality control.

And the other is a project cleaning up some waste water in a coal mine. That happens to be in Canada. So those two projects should be able to generate some early cash flow. The project that we have here at Tarong is a much longer time scale and so it's much harder to predict the time on that.

But what we need to do is to generate sufficient cash to be self-sufficient and keep slowly making progress. We're learning a whole lot of new stuff every day that makes this practical, we hope, but the proof is yet to be demonstrated.

PIP COURTNEY: Algae farming is blue sky science. It's a long way off. It may never happen, but the researcher who's been intrigued by pond scum for 25 years is convinced algae will eventually be eating CO2 at power stations, refineries and cement kilns as well as feeding both humans, livestock and fish.

With the carbon tax kickstarting investment in carbon abatement R&D, she thinks finally algae's time has come.

Does it sound too good to be true?

KIRSTEN HEIMANN: It does, but there is still research to be done and that is regarding the harvest and the system optimisation. That research is absolutely vital to make this dream a reality.