UK Energy Secretary Ed Miliband has confirmed that £200m will be provided to progress the Acorn Carbon Capture and Storage (CCS) scheme in Aberdeenshire.
Miliband – who has been visiting the St Fergus gas terminal where the project will be based – said he had told the company behind the project that he expected it to make a final investment decision by the end of the parliament.
He said he wanted to see significant progress "by the turn of the decade" but would not commit to a firm timetable.
Environmental group Friends of the Earth, which is sceptical about carbon capture, said the "scarce public money" would only directly benefit "greedy oil and gas companies".
The investment in the Acorn Project comes as part of the UK government's spending review which will increase Holyrood's budget by £2.9bn a year on average.
As part of his announcement, Miliband added that a Scottish Labour government would deliver new nuclear power in Scotland.
Acorn has said its project will safeguard about 18,000 jobs that would otherwise have been lost, including jobs at Grangemouth.
CO2 captured at Grangemouth will be transported to storage facilities under the North Sea, avoiding its release into the atmosphere.
The jobs will be needed to build pipelines to transport the CO2 safely and generate low-carbon power to homes and businesses.
The UK government is providing similar funding for the Viking carbon capture project in the Humber.
Miliband said: "This government is putting its money where its mouth is and backing the trailblazing Acorn and Viking CCS projects.
"This will support industrial renewal in Scotland and the Humber with thousands of highly-skilled jobs at good wages to build Britain's clean energy future.
"Carbon capture will make working people in Britain's hard-working communities better off, breathing new life into their towns and cities and reindustrialising the country through our Plan for Change."
