Germany is to pay out around €40 billion (£34bn) as part of its plans to phase out coal by 2038.
The national government and regional leaders have agreed on a plan to close down coal-fired power stations and have said the deadline for burning polluting lignite could be brought forward to 2035.
Coal currently powers approximately a third of the country’s electricity, much of which is in the form of lignite.
The compensation will target the states of Saxony-Anhalt, Saxony, North Rhine-Westphalia and Brandenburg and will be used to develop new infrastructure projects for coal-dependent areas, retrain workers and cover lost production.
Germany will have to carefully manage supply and demand for power as it has also committed to phasing out nuclear power by 2022 – it hopes to generate at least 65% of its electricity from renewable sources by 2030.
The government is expected to draft a law formalising the departure from coal power later this month, which it plans to get passed by parliament in mid-2020.