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BRUSSELS (Reuters) - European Parliament on Wednesday adopted draft reforms of the EU's carbon market post-2020 that aim to balance greater cuts in greenhouse gases with protection for energy-intensive industries.
The European Union's emission trading system (ETS), a cap-and-trade permit system to regulate industry pollution, has suffered from excess supply since the financial crisis, depressing their prices and heightening the need for reform.
But politicians and EU nations are divided over how best to fix the complex system, with industry and environment groups lobbying hard on opposing sides over dozens of amendments to the EU executive's proposal.
Reform efforts have also been overshadowed by Britain's decision to quit the bloc, raising fears it would also leave the EU's scheme, hammering prices.
The draft, adopted in tight vote of 379 for to 263 against, rejected a proposal for a faster removal of surplus carbon permits from the EU's emission trading system from 2021. It sticks with the European Commission proposal for the cap of emissions to decrease by 2.2 percent per year.
Climate campaigners said the reform did not go far enough to meet the EU's Paris climate pledge and help reach the its goal of a 43 percent cut in greenhouse gases from industries and power plants covered by the market compared with 2005.
The reform proposal will now be referred to the Environment Committee, whose lawmakers will lead the talks with the EU's other two lawmaking bodies - the bloc's 28 nations and the Commission - to hammer out the final legislation.
The benchmark European carbon contract fell around 2 percent following the vote, hovering around 5 euros/tonne, but Thomson Reuters carbon analysts said that market reaction to the vote will probably be short-lived.
In bid to shore up prices, the draft proposal doubles the rate at which the scheme's Market Stability Reserve (MSR) soaks up excess allowances to 24 percent per year in the first four years after its entry into force in 2019.
It also cancels 800 million carbon allowances from the MSR in 2021, with another 200 million unused permits being scrapped if a cap on overall allocations known as the cross-sectoral correction factor (CSCF) is not triggered.
To protect industry, the draft allows for the share of allowances auctioned to be reduced by up to five percent in order to cushion against the impacts of CSCF on industry.
A proposed amendment to establish a carbon inclusion mechanism for importers of certain goods, such as cement, was rejected. Such industries will be included on a list receiving free allowances to prevent them relocating abroad to avoid environmental taxes.
Reporting by Alissa de Carbonnel and Susanna Twidale; Editing by Phil Blenkinsop and David Evans