Scott Morrison faces increased pressure to stop subsidising the fossil fuel industry as he promises $540 million to reduce emissions ahead of a climate summit.
The virtual summit to be held later this week is organised by US President Joe Biden and convenes the world's biggest polluters in a bid to ramp up global efforts on climate change.
The prime minister has announced $263 million for carbon capture and storage, and another $275.5 million to set up regional hydrogen hubs.
Mr Morrison expects the projects to create more than 2500 jobs and reduce emissions.
He insists the twin technologies will be crucial if Australia plans to achieve net zero emissions by 2050.
The government has long been interested in developing hydrogen as a future fuel but is leaving the door open to create it with fossil fuels as well as renewables.
As he prepares for the summit, Mr Morrison is painting Australia as a leader in hydrogen.
"The hydrogen that can fire up furnaces that used to be done by other forms of fossil fuels, that can run those trucks, that can run long-distance transport and do all the things we need it to do," he told reporters on the NSW Central Coast on Wednesday.
Australia's peak oil and gas industry body said the investment in new hydrogen and carbon capture and storage projects would be a massive boost for the sector.
But the left-leaning Australia Institute said it was disappointing, arguing the government was using the guise of climate action to support fossil fuel companies.
Energy Minister Angus Taylor says carbon capture and storage - where emissions are stored deep underground - will allow industries to continue on while reducing emissions.
"Coal will play a big role in our energy mix for many years to come, it's an important source of our energy right now and will continue to be," he told 2GB radio.
The US is moving to phase out subsidies for fossil fuels and is using its power to urge other countries to do the same.
US energy policy expert Alden Meyer says that includes Australia.
"The old saying goes when you're in a hole the first thing is to stop digging," he told an online forum.
"We are in a big hole with climate change and yet we are paying people to produce and burn more of the things we say we don't want. It makes no sense at all."
Mr Meyer says the US has taken a whole-of-government approach to climate change, which Mr Biden described as an existential threat in his campaign.
"Australia is going to be hearing about it in every meeting," Mr Meyer said.
"This is going to be unrelenting pressure on every front where Australia has to deal with the United States."
Mr Biden is expected to pledge to halve the country's carbon emissions by 2030 from 2005 levels.
The United Kingdom will also announce ambitious carbon reduction targets that include shipping and aviation emissions.