"This innovative technology has the potential to make huge strides in our efforts to tackle climate change while kick-starting an entirely new cutting-edge industry in the UK," Britain's energy and clean growth minister Claire Perry said in a statement.
Drax said the project was the first in the world to capture carbon emissions from a biomass plant.
Carbon capture, storage and use (CCSU) involves the capture of emissions from power plants and industry to allow them to be compressed and stored for use in industrial applications such as making drinks fizzy.
Climate scientists say the technology is likely to be needed to help meet the international Paris climate agreement to try to limit a rise in global temperatures to 1.5 degrees Celsius. (Full Story)
Earlier attempts to capture and store emissions underground (CCS) in Europe have largely failed. An European Union programme in 2012 did not go on to fund a single CCS project and a British support scheme was cancelled in 2015.
However, the hope is that finding ways of using the carbon dioxide, rather than simply storing it, will help the technology to become more economically feasible.
(Reporting by Susanna Twidale; editing by David Evans)