Fully electric cars will be prioritised for tax cuts over hybrids and the commonwealth fleet will be electrified in a deal cut with the government by the Greens and Senate independent David Pocock.
Labor had planned to cut fringe benefits tax on low-emission vehicles to encourage fleet owners and employers to replace petrol vehicles with greener alternatives.
But the laws were set to be blocked by the Senate crossbench because they supported plug-in hybrids that also feature petrol engines.
The changes, if passed, could slash the price of some EVs by $4700 for individuals or up to $9000 for businesses. Savings would be backdated to July.
The tax cuts would apply to battery electric, hydrogen fuel cell and plug-in hybrid vehicles.
Party leader Adam Bandt said on Tuesday the Greens had reached a deal which will see support for petrol-based plug-in hybrids phased out on April 1, 2025.
Priority will also be given to battery electric vehicles in the government fleet procurement policy by removing hybrids in all but exceptional circumstances.
Additionally, the tax office will issue guidance on when household charging technology can be included in FBT-exempt vehicle packages.
"The Greens have fast-tracked electric vehicles," Mr Bandt said.
"The government fleet will go electric and when these cars are sold second-hand, it will help bring the cost down of EVs for everyday people."
He said it showed the government could be pushed into going "further and faster on climate".
Greens Senator Sarah Hanson-Young said the government should use the two-year window for phasing out plug-in hybrid support to roll out more charging stations to speed up Australia's transition.
"The government needs to come to the party with the other policy measures needed to ensure people have the opportunity to charge, to recharge and to afford that infrastructure," she said.
"That's now the government's job and we look forward to seeing some better results and some more policy ahead of the next budget."
Senator Pocock, who proposed the "sunset clause" on discounts for plug-in hybrids, said it was important to cut the price of electric cars but he did not want to see the second-hand market flooded with hybrid vehicles still using petrol engines.
"My position is that plug-in-hybrids are a fossil fuel technology that should not be subsidised by taxpayers in this bill," he said.
"This bill provides tax incentives to mostly wealthier Australians through fleet vehicles, which will create a much-needed second-hand EV market in a few years' time."
Senator Pocock said he hoped more Australians would be able to afford electric vehicles as a result of the discount and access "much lower fuel costs, lower maintenance costs and a better driving experience".
Good Car Company co-founder Anthony Broese van Groenou, who operates a second-hand marketplace for electric vehicles, welcomed the tax cuts but said including plug-in hybrid cars in discounts was short-sighted.
Mr Broese van Groenou said lab-based research had overstated their green credentials.
"In the real world people don't use them like they're meant to be used," he said.
"A lot of people get the car to get a subsidy and then they just drive them like a petrol car or they forget to plug in.
"You've also got the worst of both worlds: you've got a half-electric, half-petrol car and the performance aspect of both is limited."
Plug-in hybrid vehicle sales in Australia have been low to date, with Federal Chamber of Automotive Industries figure showing battery electric vehicles outselling plug-in and standard hybrid vehicles combined in October.
