The government will fund $285m to the Swan Hills Synfuels project as part of its $2bn CCS funding program.
The coal gasification project will tap into a deep, unmineable coalbed near Swan Hills and turn the coal into a synthetic gas or syngas while underground, which will be used later to generate electricity.
The project will also capture up to 1.3 million tons of CO2 per year that will be used for enhanced oil recovery in the area.
Construction is expected to commence in 2013 with carbon capture to begin in late 2015.
