By Barbara Lewis and Susanna Twidale
BRUSSELS/LONDON (Reuters) - European Union member states reached a provisional agreement that carbon market reforms should begin on Jan. 1, 2019, at closed-door talks on Wednesday, paving the way for a further round of negotiations next month, diplomats said.
Member states have been arguing for weeks over when a reform referred to as the Market Stability Reserve (MSR) should be introduced to remove some of the surplus allowances that have depressed permit prices on the EU Emissions Trading System (ETS).
The ETS is meant to be central to the EU's efforts to reduce carbon emissions, but oversupply following recession has meant the price of permits is so low, it is very cheap to burn coal, the most carbon-intensive of the fossil fuels.
Carbon allowances traded around 1.5 percent higher at 7.50 euros. Briefly they hit 7.53 euros ($8.41), their highest since late February.
Poland, whose economy relies on coal, had been leading a blocking minority opposed to making any changes before 2021, but the sources said that on Wednesday the Czech Republic had left that group and supported a 2019 date.
Mark Lewis, analyst at Paris-based financial services group Kepler Cheuvreux, said a 2019 start was bullish for carbon prices and it was possible they could reach 10 euros by the end of the year.
The deal means a round of negotiations to agree a legal text can go ahead on May 5, with representatives of the European Parliament and the European Commission.
To break the deadlock, Latvia, holder of the EU presidency, proposed financial incentives for poorer member states, according to a document seen by Reuters on Tuesday.
It also put forward the compromise date of Jan. 1, 2019, to start the reforms and said unallocated allowances, surplus because of factory closures, should be put into the MSR in 2020.
Following Wednesday's meeting, diplomats said they expected unallocated and backloaded allowances, temporarily removed from the market under a previous reform, would go into the reserve.
The date of Jan. 1, 2019, is two years earlier than the European Commission's original proposal, but the Commission had since said it would favor an earlier start if member states would agree.
The European Parliament and some member states, notably Britain and Germany, have backed early reform to drive investment in zero carbon energy, including renewables and nuclear power.
(Editing by Robert-Jan Bartunek and Mark Potter)