"We've reached an agreement," a coalition source said, referring to the carbon capture and storage (CCS) law.
But sources said the agreement only allows for individual test sites rather than allowing a more comprehensive framework for CCS across Germany.
The breakthrough was reached in a meeting of parliamentary floor leaders from Chancellor Angela Merkel's Christian Democrats and the Social Democrats Volker Kauder and Peter Struck, respectively and Environment Minister Sigmar Gabriel.
The conservatives said they planned to delay voting on the draft law on CCS amid concerns about it.
The CCS law would pave the way for further developing technology aimed at cutting pollution from coal-burning power plants, by holding CO2 indefinitely in underground storage facilities.
The coalition has spent months wrangling over rules to regulate the efforts of utilities such as E.ON, RWE and Vattenfall Europe to test and install the technology early enough for large-scale commercial use after 2020.
Speedy progress of the law is needed to allow these firms to meet timetables for pilot plants ahead of full commercial production planned for 2020, and to ensure that CO2 taken from the plants can be piped into suitable stores by that date.
Germany derives 50 percent of its power from coal but without CCS will not be able to keep this up in coming years, as stringent EU laws aimed at discouraging CO2 emissions set rising financial penalties on conventional coal burning.