Resources minister Martin Ferguson has unveiled draft legislation to establish the world's first framework for carbon dioxide capture and geological storage (CCS).
Mr Ferguson said it involved capturing greenhouse gas emissions, predominantly from coal-fired power stations, before they reached the atmosphere.
The gas is then injected and stored deep underground in geological formations similar to those which have stored oil and gas for millions of years, he said.
"With 83 per cent of Australia's electricity generated from coal, no serious response to climate change can ignore the need to clean up coal and the Government's establishment of a CCS framework represents a major step towards making clean coal a reality," Mr Ferguson said.
"CCS is essential for the long-term sustainability of coal-fired power generation and the potential of new industries such as coal-to-liquids, which could improve Australia's liquid transport fuel security."
He said the draft legislation had been referred to the House of Representatives Primary Industries and Resources Committee to conduct comprehensive review before the bill was introduced to Parliament later this year.
The legislation establishes access and property rights for injection and storage of greenhouse gases into a stable sub-surface geological reservoir in commonwealth waters more than three nautical miles offshore.
the legislation provided for appropriate consultation and multiple use rights with other marine users, including fishing and petroleum industries, Mr Ferguson said.
"Australia has the capacity to inject and store a significant amount of its carbon emissions in these reservoirs and my Department, through Geoscience Australia, is assessing numerous sites for geological storage," he said.
The work of Geoscience Australia, plus government support of CCS research through the CO2 Cooperative Research Centre, placed Australia at the forefront of this pioneering technology the minister said.