BRUSSELS - The Council of the European Union (EU) on Tuesday approved the reform of the emission trading system (ETS) for the period from 2021-2030.

This legislation sets a cap on how much carbon dioxide heavy industry and power stations can emit and the total volume of allowed emissions is distributed to companies as permits that can be traded.

According to a statement of the Council, the reform is a key step for the bloc to reach its target of cutting greenhouse gas emissions by at least 40 percent by 2030, therefore realizing its commitments under the Paris Agreement.

The revised ETS will include three elements. First, the cap on the total volume of emissions will be reduced annually by 2.2 percent.

Secondly, the number of allowances to be placed in the market stability reserve will be doubled temporarily until the end of 2023.

Lastly, a new mechanism to limit the validity of allowances in the market stability reserve above a certain level will become operational in 2023.

The formal approval at the Council was the final step in the legislative process, said the statement, and the new directive will enter into force on the 20th day following its publication in the official journal.

The ETS of EU was established in 2005 and is the world's first major and the largest carbon market, which operates in all 28 EU member states and Iceland, Liechtenstein and Norway.