"Canada possesses the technology, geology, and expertise to be a world leader in the development and implementation of CCS (carbon capture and storage) technology," the report said.

"But as with any new environmental technology, a financial gap exists between the cost of a plant with CCS and what would otherwise be built to produce the same industrial outputs."

The panel, chaired by Steve Snyder, president of TransAlta Corp. Canada's publicly traded energy generator, said the C$2 billion in government aid should help industry get three to five projects operational by 2015.

The technology involves separating carbon dioxide from emissions from large industrial or energy-producing facilities. The carbon dioxide is then compressed and injected deep underground.

Conservative Prime Minister Stephen Harper set up the panel last year.

Harper, elected in 2006, has said Canada will not be able to meet its obligations under the Kyoto protocol on climate change without taking steps he said would cause economic havoc. He has instead looked largely to technological innovations which have yet to get off the ground in a large-scale commercial way.

The Pembina Institute, an environmental group, expressed concern, saying carbon capture should not be used as a replacement for having large polluters -- such as Alberta's oil sands producers -- reduce their emissions of the greenhouse gases that are linked to global warming.

It also disagreed with a recommendation that taxpayers should help subsidize the projects.

"It is neither necessary nor appropriate for the governments to accept a recommendation that every Canadian should pay over US$70 for industry to cut its own pollution," Dan Woynillowicz, the group's senior policy analyst, said in a statement.