"With this measure the EU can demonstrate to the world that it is not simply talking about the problem of global warming but taking practical action to address the issue," British Liberal Democrat parliament member Chris Davies said.

The emissions trading directive is the centrepiece of the EU's efforts to reach its target under the United Nations Kyoto Protocol on climate change to reduce greenhouse gas emissions by eight percent of 1990 levels by between 2008 and 2012.

The scheme is supposed to allow market forces to determine the price of reducing CO2, the main gas blamed for trapping heat in the atmosphere, the "greenhouse effect" which many scientists say could cause disastrous changes to the world's climate.

The industries affected - including oil refineries, steel, cement, ceramics, glass and paper - will feel the pinch next March when EU governments must say how they will allocate the CO2 allowances firms will need to operate from 2005.

Governments will give out at least 95 percent of them free of charge but could choose to auction the rest.

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The allowances will have a monetary value because companies that reduce their emissions will be able to sell excess credits to other firms that cannot reach their CO2 caps.

The European Commission said CO2 credits could change hands for around 15 euros a tonne. Companies that fail to reach their targets or buy enough credits to make up the shortfall will be fined 40 euros per tonne, rising to 100 euros after 2008.

The sectors affected produce 46 percent of EU CO2 emissions.

The legislation was finalised in talks between parliament's lead member on the issue, Portuguese centre-right Euro MP Jorge Moreira da Silva, and the Greek presidency of the EU.

Moreira da Silva said he was confident parliament would pass the law. "There is no uncertainty. All the political groups support this agreement," he told Reuters.

Although the emissions trading market will initially be restricted to EU industries, firms may later be able to buy CO2 credits from outside the bloc from other Kyoto Protocol states.

Under the final version of the law, factories might be allowed to opt out of the scheme if they can show they are making the equivalent effort to reduce greenhouse gases.