EU environment ministers are bracing for a tough debate on Tuesday to find a compromise on reforms to the carbon market, EU sources said, with nations split over how to balance climate ambitions with protection for energy-intensive industry.

The bloc's 28 nations are pushing for an accord after the European Parliament last week adopted a draft reform of the European Union's emissions trading system (ETS).

The cap-and-trade permit system is the EU's flagship policy for meeting its climate goals by regulating emissions at 11,000 industrial and power installations. It has suffered from excess supply since the financial crisis, which depressed prices.

But EU nations are divided over three major issues: the level of ambition in measures to strengthen prices; how much protection industry needs to remain competitive; and how best to manage funds to help laggards modernize their economies.

"We are bracing for battle," one EU diplomat said.

EU nations need a common position before beginning talks with parliament and the European Commission - the final leg of EU legislation on the reforms tabled by the EU's executive arm more than a year ago.

The bloc is also keen for swift adoption of what will be its first big piece of climate legislation since it ratified the Paris accord on curbing global warming. The ETS is the EU's main tool to achieve its goal of a 43 percent cut in greenhouse gases from industries and power plants compared with 2005.

"It'll be negotiations until the death," one EU diplomat quipped. Another said: "Most EU countries want a deal as soon as possible but positions are still far away from each other."

If they fail to find common ground in talks on Tuesday, the issue will be bumped to the next Environment Council meeting in June, delaying reforms.

Pushing for measures to shore up permit prices are some eight EU nations led by France, Sweden and Britain, EU sources said.

They back the parliament's proposal to double the rate at which the scheme's Market Stability Reserve soaks up excess allowances. They are also mulling a plan to scrap permits above a set ceiling and an expiration date to cancel surplus permits after five years.

For other member states such as Germany, Italy, Austria and Greece, priority is being given to measures for ensuring that the regulation does not spur big industry to relocate abroad.

They want more permits to be freely doled out to industry rather than put for auction if a cap on overall allocations that slashes free allowances across the board, known as the cross-sectoral correction factor, is triggered.

Poorer member states in Central and Eastern Europe, for which coal remains a large share of the energy mix, are keen to get the most generous provisions possible to help modernize their economies - prompting other nations to seek limits.

Thomson Reuters carbon analyst Anders Nordeng said failure to reach a compromise on Tuesday would be bearish for markets as it would signal a tough stance by Poland and other countries that are keen to water down the reforms.

Source: Reuters