The EU system to regulate industry pollution and help meet climate goals has suffered from excess supply of permits to pollute
* European Parliament agreed in outline on reforms in February
* Next round of talks with EU nations due July 10
* Industry says reforms could be unfair to EU businesses
BRUSSELS, June 28 (Reuters) - European Union nations and the European Parliament remain divided on how to reform the EU carbon market and whether it should mention aviation and shipping, EU sources said on Wednesday.
Negotiations to finalise a legal text on reforms to the EU Emissions Trading System (ETS) post-2020, agreed in outline by the European Parliament in February, have dragged on for weeks.
The ETS, a cap-and-trade system to regulate industry pollution and help the 28-nation bloc meet its climate goals, has suffered from an excess supply of permits to pollute, adding political urgency to efforts to pass reforms.
The next round of talks will take place on July 10, with the Estonian presidency of the EU saying it will push hard for progress on the complex file during its six-month chairmanship.
"We will get out of the blocks quickly," a spokeswoman for the Estonian presidency said. "We will work hard to reach a fair and balanced compromise."
In talks this week - the first held with British deputy Julie Girling, who took over as parliament's lead negotiator from fellow conservative Ian Duncan - the sides sought to lay out where the sticking points lay in finding common ground.
The two EU institutions agreed on doubling the rate at which the scheme's Market Stability Reserve (MSR) soaks up excess allowances, as a short-term measure to strengthen prices, the sources said.
They broadly shared concerns about protecting industry from undue burden from climate legislation, including the reduction of free allocations if a cap on overall allocations known as the cross-sectoral correction factor (CSCF) is triggered, they added.
But they disagree on what share of carbon credits should go to auction versus being freely dolled out to industry, how to compensate industry from indirect emission costs under the system and earmarking funds for climate friendly innovation, the sources said.
Girling, who also oversaw parliament's review of draft legislation on a cap-and-trade system for aviation, held firm on mentioning aviation and shipping sectors - included in the chamber's draft text out of frustration with a lack of international progress on regulating their emissions.
However, EU sources said these provisions would likely be traded away during ongoing talks with EU member states.
The ETS is the EU's flagship policy to meet its goal of cutting greenhouse gas emissions from 11,000 industrial plants and power stations by 43 percent by 2030 when compared with levels in 2005. (Reporting by Alissa de Carbonnel; Editing by Edmund Blair)
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