Factbox-The EU's plan to overhaul its carbon market

By Kate Abnett

BRUSSELS, July 17 (Reuters) - The European Commission proposed sweeping changes on Friday to the EU's emissions trading system, Europe's biggest climate policy, allowing industries to emit ​CO2 longer while offering more financial support to invest in clean technologies.

Here's what you need to know.

SPEED OF CO2 CUTS

The European Union's ETS forces power plants and heavy industries to buy a permit for every metric ton of CO2 they emit, and caps the number of permits released each year to make sure emissions gradually decrease.

The Commission proposed slowing the rate at which this cap declines, lowering the "linear reduction factor" to 3.7% in 2031 and 1.7% in 2036 from 4.3% today, effectively slowing the rate at which companies will have to cut emissions.

The proposals would also halve to 12%, from 24% today, the rate at which a "market stability reserve" adds or removes permits from the ETS if supply fluctuates dramatically. 

Both changes mean more CO2 permits will remain available in future years for industries to buy, giving them leeway to emit more.

The EU will also buy international carbon offset credits to cover 2% of the emissions reductions required by ETS sectors from 2036, softening the efforts required by domestic industries.

While the changes will slow down the ETS, the Commission said they were designed to make sure the system still meets the EU's 2040 climate goal to cut net emissions by 90%. The ETS covers around 40% of EU emissions.

FREE PERMITS

The Commission proposed giving heavy industries free CO2 permits until 2038, rather than ending them in 2034, when they were due to be replaced by the EU's carbon border charge on imports for sectors including steel and cement manufacturing. 

As a result, the EU will delay the full phase-in of the carbon border levy to 2038.

The free permits are no free lunch. The Commission wants to attach conditions to them, granting 80% upfront to ‌companies that have plans to invest in decarbonisation in Europe. Companies would get the remaining 20% only after those investments are made.

As a reward to firms investing in cutting CO2, the 10% most efficient industrial installations won't face these conditions.

The EU proposed giving industries more free permits overall than currently planned, by reducing the "benchmark" rate which cuts these handouts each year to 2% from 2030 from 2.5% today. 

A separate, fast-tracked proposal will also soften these benchmarks for 2026 to 2030, handing industries extra free permits worth €6 billion ($6.86 billion), the Commission said.

FUNDING

The ETS has generated €260 billion in revenue since 2013. Of this, 80% went back to the national budgets of governments.

The Commission proposed that governments will have to spend at least 50% of their future ETS revenues on domestic industries, a move likely to face resistance from finance ministries who use the proceeds to plug national budget gaps.

The EU will also set aside 400 million carbon permits — worth around €30 billion — until 2030 as an investment "booster" fund to help industries invest in clean tech.

Industries will be able to bid for a share of a further €70 billion worth of allowances from 2031 to support decarbonisation investments.

An existing fund which spends ETS revenues on clean energy investments in the EU's poorest member countries will also be continued past 2030, with 280 million CO2 permits earmarked for this.

PLANES, SHIPS, WASTE

The Commission proposed expanding the ⁠ETS to ​cover emissions from flights departing Europe for destinations up to 5,000 km (3,107 miles) ​away — a move that would capture trips to Dubai and Istanbul, but not the U.S. or China.

Currently, the ETS only applies to flights within Europe.

The EU also proposed adding emissions from ships as small as 400 gross tonnage to the ETS, down from 5,000 today, and giving maritime firms 110 million free CO2 permits which they can monetise to invest in clean fuels and shipping technologies - a system it already offers airlines.

Emissions from waste incineration will also be added to the ETS gradually, from 2031 to 2034. Countries can dodge this until 2035 if they meet conditions including having a national carbon tax, or being on track to meet EU recycling targets.

NEXT STEPS

EU countries and the European Parliament will propose their own amendments, and negotiate the final rules. That process can take a year.

($1 = 0.8740 euros)

(Reporting by Kate Abnett; Editing by Jan Harvey)