The National Clean Coal Fund will support activities and investments worth $1.5 billion in cooperation with the industry's COAL21 initiative and support from other stakeholders including state governments, researchers and industry.
It will also support a $75 million clean coal research program, a $50 million post-combustion capture plant in the La Trobe Valley and a $50 million pilot coal gasification plant in Queensland.
Funding for the National Clean Coal Fund will commence in 2008-09.
Resources and Energy Minister Martin Ferguson said coal, which provides around 80% of Australia's total electricity, accounts for around 32% of the country's total greenhouse gas emissions.
"Coal is vital to the Australian economy and to the developing world … therefore no serious response to climate change can ignore the need to clean up coal," he said.