Under the EU project, 12,000 plants including power stations, steel-makers and other energy-intensive industries will buy and sell carbon credits -- the right to emit carbon dioxide (CO2).

It is the linchpin of the 25-nation bloc's plan to reach its Kyoto Protocol target and cut greenhouse gas emissions by eight percent of 1990 levels over the period 2008-12.

"This progress report gives grounds for optimism that both the EU-15 and the new member states are well on course to meet their Kyoto targets," EU Environment Commissioner Stavros Dimas said in a statement.

The report said by 2002 the former 15-nation bloc had reduced greenhouse emissions by 2.9 percent compared to the 1990 base year. The enlarged 25-nation bloc had cut emissions by 9.0 percent.

The Commission predicts the former EU-15 will reduce emissions by 8.6 percent by 2010.

But the Commission warned that a 22-percent rise in emissions in the transport sector over the period 1990-2002 could scupper progress. The transport sector is not part of the EU's CO2 trading scheme and has no caps on emissions.

Under the trading scheme, countries must submit plans to the Commission detailing or allocating the amount of emissions their installations are allowed to have.

The scheme will start on Jan. 1 in 21 EU states. Poland, Czech Republic and Italy have submitted plans but they will not be assessed in time. Greece has not yet sent a scheme to Brussels.