Explosives made from ammonium nitrate are widely used by industry and research released on Thursday by the independent Institute for Energy Economics and Financial Analysis suggests a "triple win" from production going green.
Report author Cameron Butler said ammonia production accounted for roughly five per cent of the nation's total gas use, making it the second-highest user of gas across Australian manufacturing.
With more than half of Australia's ammonia used to produce explosives, miners have significant buying power but no incentive to raise operating costs by paying over the odds for new lower-carbon materials.
Long-term supply deals from facilities powered by green hydrogen rather than gas could provide certainty for investment, but progress is slow without government targets for green hydrogen adoption.
"Decarbonising ammonia facilities presents the opportunity of a triple win: alleviating domestic gas market pressure, reducing emissions and catalysing Australia's emerging green hydrogen industry," Mr Butler said.
Ammonia is an important industry for Australia as a critical material for agriculture and manufacturing as well as mining.
But government projections have emissions from the chemicals sector remaining broadly flat through to 2035, underscoring a "lack of attention" to decarbonising existing plants any time soon, the report said.
NSW's Hunter region, Gladstone in Queensland and the Pilbara and Kwinana in Western Australia have been identified as potential hydrogen hubs under a national hydrogen strategy, which could support green ammonia production.
Green hydrogen, produced through electrolysis powered by renewable electricity, is considered a key economic opportunity to transform Australia into a "renewable energy superpower".
Institute CEO Amandine Denis-Ryan said Australia's existing ammonia plants are perfectly located in regions with abundant renewable resources.
But barriers include high production costs for green hydrogen, a lack of demand for more expensive products, and a failure by governments to reduce investment risk.
A chemical company plans to expand an ammonia plant in Kwinana, which could provide a "powerful opportunity" to demonstrate a different way of running the domestic ammonia supply chain, the report said.
Part of the Wesfarmers conglomerate, the proposed expansion adds emissions of more than half a million tonnes a year during the 35-year life of the project, official figures show.
According to the WA Environmental Protection Authority, the project will use gas from the Dampier to Bunbury pipeline for hydrogen production from a 10-megawatt electrolyser to manufacture ammonia.
If it used green hydrogen instead, it could create demand for 53,000 tonnes of green hydrogen per year, the report found.
Switching all of Australia's ammonia production off gas could create demand for 350,000 tonnes of green hydrogen per year.
Moving to 20 per cent green ammonia for explosives production by 2025 would increase mining operating costs by less than 0.1 per cent, modelling showed.
A full switch to 100 per cent by 2030 would increase mining operating costs by up to 0.4 per cent, although rising gas prices could eliminate the green premium.
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