PacPyro's ''carbon-negative electricity'' pilot-scale project will turn two tonnes of municipal organic and wood waste an hour into electricity and biochar and store as much as 50,000 tonnes of carbon dioxide a year.

It will be built over the next 12-18 months at one of the existing suburban waste facilities operated by partner Transpacific Industries, which will provide the feedstock.

PacPyro's chief technology officer Adriana Downie said the $10 million project would be the first in Australia to make marketable quantities of biochar, which would be sold as a soil enhancer for a few hundred dollars a tonne, a price comparable to premium potting mix.

Biochar, the product of slow pyrolysis or burning without oxygen, has attracted significant interest from both sides of politics because of its potential to draw down large quantities of carbon dioxide from the atmosphere, while generating energy.

Biochar is recognised under the federal Carbon Farming Initiative, meaning PacPyro will be able to sell carbon credits to polluters liable under the proposed federal carbon tax regime, as well as electricity into the grid and renewable energy certificates.

Ms Downie said at a carbon price of $23 a tonne, the project would generate credits worth $1 million a year. ''If the [carbon tax] goes through, there's going to be billions of dollars in this space.''

A government spokesman confirmed that conditional funding support had been offered to PacPyro but said the project was at a very preliminary stage.

The grant was from the Victorian government's Energy Technology Innovation Strategy, designed to support projects with high technology risk. The strategy received an extra $41 million funding in the last budget.

The spokesman said the increase - almost double the program's funding under Labor - showed the Coalition was ''putting serious money into renewable and low-emissions technology''.