A $1 billion coalmine extension could lock in decades of supply to Australia's biggest steel maker and not upset state or national plans for achieving net zero emissions by 2050.
"Coal will continue to be part of Australia's economy for decades to come," a spokesman for federal Energy Minister Angus Taylor told AAP.
The Dendrobium coal mine expansion proposed by BHP spin-off South32 was blocked by NSW's planning commission in February because of threats to Sydney's water supply.
Critics also raised concerns over the more than 250 million tonnes of greenhouse gas emissions projected over the life of the project.
But now NSW Deputy Premier Paul Toole has declared the mine extension as State Significant Infrastructure (SSI), citing its importance to Port Kembla steelworks and thousands of workers.
If approved, the extension of the mine near Wollongong would allow the extraction of an additional 78 million tonnes of coal from new areas underground.
The project would also lock in BlueScope Steel's preferred blend of coking coal through to 2048, despite rivals beginning to look at how to make "green steel" with hydrogen and renewable energy.
"South32 welcomes the NSW government's decision to declare the Dendrobium mine extension project to be State Significant Infrastructure," a company spokesman said.
"This marks an important step."
Steelmaking is one of the biggest emitters worldwide and the NSW decision comes as governments here and abroad put taxpayer dollars into new technology for a cleaner industry.
By 2050, green hydrogen could be the cheapest production method for steel and capture a third of the market, displacing Australia's top spot in the global supply chain, according to energy research provider BloombergNEF.
But Australia currently produces lower grade ores and could lose out if it does not invest in equipment to upgrade its product, their latest report says.
Getting the cost of green steel down has been identified as a priority by the federal government but Australia's Long Term Emissions Reduction Plan suggests green steel won't be compete on costs until after 2030.
The Illawarra blend of metallurgical coal is BlueScope's preferred option as it produces a high-quality coke, which cuts operating costs, according to analysts at Global S&P.
South32 will now submit a new mine plan for approval under the SSI process that puts the deputy premier in charge.
NSW independent MP Justin Field said on Monday the state's planning system risked becoming a "farce" without an independent economic assessment to test the "dubious" claims of South32.
BlueScope Steel has a climate chief dabbling in new technologies for its Port Kembla works, including biochar and hydrogen, but is on record as not wanting to be a leader in green steel.
Rio Tinto and BlueScope agreed in October to explore "low-carbon steelmaking" using Pilbara iron ores, and clean hydrogen.
BlueScope is also working with federal agency CSIRO on a pilot project.
But green steel is "decades away", according to Bluescope's court testimony backing the Dendrobium mine extension.
NSW Treasurer Matt Kean still has hopes for future green steel production.
The WA government is also investigating green steel, chipping in $1 million last month to support the global steel industry's green ambitions.
A Grattan Institute report last year found green steel was "no longer a fantasy" because of progress on using hydrogen rather than coal to strip the oxygen out of iron ore to make steel.
The analysis showed Australia could capture about 6.5 per cent of the global steel market, generate $65 billion in annual exports and create 25,000 manufacturing jobs in Queensland and NSW.
Australian Associated Press