The project - involving CS Energy, Schlumberger, Xstrata Coal, the Australian Coal Association (ACALET) and three Japanese companies - will capture and store about 17,000 tonnes of CO2 a year for up to three years and help reduce other noxious gases.

Announcing the move on Friday, Federal Resources and Energy Minister Martin Ferguson said the government would contribute $50 million towards the project from its Low Emissions Technology Demonstration Fund.

He said this money would help advance new technology and provide a platform to support the development of geological storage projects with more than 1 million tonnes of CO2 capacity a year.

"The project involves the retrofit of oxyfuel technology to a 30 megawatt unit at Callide A power station for electricity generation," Ferguson said.

"It will provide detailed engineering design, costing data and operational experience, and help underpin the commercial development and deployment of this technology."

The three Japanese companies involved in the project are IHI Corporation, J-Power and Mitsui & Co.