The proposal comes as average gasoline prices in the U.S. have topped $4 per gallon, and energy policy has become one of the foremost issues in the presidential campaign.
"Whether it takes a meeting with automakers during my first month in office, or my signature on an act of Congress, we will meet the goal of a swift conversion of American vehicles away from oil," McCain said in prepared remarks.
McCain said that the federal government should play a role in advancing practical scientific research.
"Think of all the highest scientific endeavours of our age - the invention of the silicon chip, the creation of the Internet, the mapping of the human genome," he said. "In so many cases, you can draw a straight line back to American inventors, and often to the foresighted aid of the United States government."
McCain offered a $5,000 tax credit to consumers who purchase "a zero-emissions car," and smaller tax credits for low-emissions vehicles. The credit is intended to encourage automakers to develop new energy-efficient cars and "broaden the market".
He also proposed a $300m prize "for the development of a battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars".
The speech is an attempt to court green-minded voters who typically lean Democratic. It is also a further break on energy and environmental policy from the Bush administration, which is closely tied to the oil industry.
Environmental groups were sceptical of McCain's commitment to clean energy. McCain called for US coastal waters to be opened to oil drilling and called for construction of 45 new nuclear power plants by 2030. He was the only senator not present for a December vote that would have repealed tax breaks for oil companies.
"Here he's proposing a prizes for this development, but meanwhile he refuses to support measures that are on the table right now in the Congress," said Josh Horner, spokesman for the Sierra Club, which endorsed presumptive Democratic nominee Barack Obama. "It's a little disingenuous for him to be talking about where we need to go, and not doing anything to get us there."
Obama has promised $150 billion in investment in clean-energy research, including development of biofuels, hybrid vehicles and other programmes.
"In 26 years in Congress, McCain had chance to make a difference for energy security and America's families, and he consistently not only didn't make a difference but has stood in the way of people like Senator Obama who have been trying to improve our energy security," said Jason Furman, an adviser to Obama.
McCain has been sceptical of biofuels like ethanol, made from corn, and criticized government subsidies for ethanol production, especially during a time of escalating food prices.
"Corn-based ethanol, thanks to the money and influence of lobbyists, has been a case study in the law of unintended consequences," McCain said. He also criticised U.S. tariffs on sugar-cane based ethanol from Brazil.
"The result is that Americans take the financial hit coming and going," he said. "As taxpayers, we foot the bill for the enormous subsides paid to corn producers. And as consumers, we pay extra at the pump because of government barriers to cheaper products from abroad."
McCain's coolness to ethanol puts him at odds with Obama, many of whose close advisers and supporters are tied to the ethanol industry, the New York Times reported.
"Senator Obama has been a consistent advocate of fracturing the monopoly that the oil companies have on our nation's transportation system," Jason Grumet, an Obama adviser, said.
McCain indicated he would raise the penalty levied against automakers that violate fuel efficiency standards.
The standards "standards should serve large national goals in energy independence, not the purpose of small-time revenue collection," he said.