The Climate Institute claims the Cobbora decision is creating a “negative carbon price” because it will be supplying coal at below market prices to energy retailers while the federal government introduces carbon pricing.

“China does the same thing, by subsidising coal while investing in renewable energy,” the institute’s deputy chief executive Erwin Jackson told ABC.

The NSW government announced it would return to coal mining and develop Cobbora after hitting a dead end in price negotiations with preferred tenderer Whitehaven Coal as it sought to lock in supply of coal before privatising its electricity assets.

The move would be the first time NSW government has mined coal since selling its Powercoal assets to Centennial Coal eight years ago, and comes as the state’s $8 billion electricity privatisation processes threaten to stall once again.

NSW electricity generators already trade under the state Green House Gas Reduction Scheme which costs carbon emitters about $5 per tonne.

The cost is expected to go much higher through the federal government’s proposed carbon pricing which seeks to make high-emission energy less attractive.

“The government is making it hard for investors in renewable energy to come into the market by depressing the price of coal-fired electricity,” Jackson said.

He warned that NSW – which has already missed out on federal government infrastructure funding – could miss out on investments that would be created through the federal Renewable Energy Target.

“Most companies are making strategic decisions about the low-carbon future, they are looking to the new industrial revolution – subsidising coal producers is looking in the wrong direction,” he said.

State-owned utilities Macquarie Generation, Delta Electricity and Eraring Energy had formed an unincorporated joint venture to back Cobbora, but originally had aimed to secure a mining company to develop and operate the mine.

The JV is seeking state government approval to mine 30 million tonnes per annum of raw coal and produce 20Mtpa of product coal. Open cut mining is slated to start in 2013 for a life of 21 years.

The NSW government granted a two-week extension of the deadline to November 15 for bids for its power stations, with AGL Energy, Origin Energy and TRUenergy seen as the most likely purchasers.

Greenpeace spokesman John Hepburn said the government was encouraging “dirty coal mining pollution” and increasing greenhouse emissions.

“They don't seem to be embarrassed by that fact,” he told ABC.

“It is possibly the most outrageous public policy decision in a generation.”