The government wants to approve the technology to help counter emissions in heavily polluting industries, such as the cement and lime industries, according to the Economy Ministry.
Under a planned amendment to the law, which must still be signed off by the German parliament, carbon storage would also be allowed in the seabed, and in some cases underground on land.
"Carbon capture must be made possible in Germany, otherwise we will not be able to meet our climate protection targets," said Economy Minister Robert Habeck.
By authorising carbon capture and storage, Germany would be "catching up with our European neighbours such as Norway and many other countries", Habeck said.
"In this way, we are living up to the responsibility we have as a major industrialised country in Europe when it comes to dealing with greenhouse gas emissions."
Carbon capture involves extracting CO2 from industrial sources and then either transporting it to bury underground or reusing it as an ingredient in products such as synthetic fuels or chemicals.
The process can be used to syphon off CO2 from the exhaust, or flue gas, of fossil fuel-fired power plants as well as heavy industry.
In the fall of 2023, there were some 40 commercial-scale facilities worldwide applying carbon capture, isolating a total of 45 million tonnes (Mt) of CO2, according to the International Energy Agency (IEA) -- around 0.1 percent of annual global emissions.
The UN Panel on Climate Change (IPCC) considers the technology to be unavoidable in the drive to limit global warming to 1.5 degrees Celsius above pre-industrial levels.
But opponents of carbon capture fear it is being hailed as an easy ticket to avoid making the sacrifices needed to slow climate change.
Environmental groups criticised the German plans, with Greenpeace claiming they offered only the "illusion of a solution".
Carbon capture has not been sufficiently tested, is "far too expensive, complex and would take decades to realise", the group said.
The BUND environmental campaign group said plans to allow gas-fired power plants to use the technology would "undermine" the energy transition and jeopardise the phase-out of fossil fuels.
Germany, Europe's biggest economy, aims to reduce CO2 emissions by 65 percent by 2030 and achieve climate neutrality by 2045.
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