The EU scheme sets limits on the amount of CO2 factories such as power stations and oil refineries may emit. Companies sell permits to emit if they come in below their caps or buy them if they produce more CO2 than allowed.

Preliminary data from 2006 showed Estonian companies covered by the scheme emitted 12.04 million tonnes of CO2 that year, far below a government allocation of more than 18 million tonnes.

Estonia is a small player in the overall EU scheme. Roughly 40 installations in the country were covered in the 2005-2007 period, accounting for less than 1 percent of the total number of allowances issued EU-wide.

Germany, by comparison, had some 1,850 installations in that period, accounting for about 23 percent of CO2 allowances.

But the Commission's action is significant in sending a consistent signal to the carbon market that it wants to create scarcity in the number of permits available in the second phase.

Carbon prices for 2008 delivery rose 15 cents to 19.25 euros per CO2 tonne on the European Climate Exchange after the Commission decision, reversing an earlier fall.

The scheme is the 27-nation EU's key tool to fight climate change and meet commitments to cut emissions agreed under the Kyoto Protocol.

Brussels has now issued decisions on 20 plans. Of those, only three countries -- Britain, France and Slovenia -- have not been forced to adjust their proposed caps.

The Commission demanded big cuts after 2005 data showed EU governments gave away more emissions rights to industry than needed, leading to a crash in CO2 allowance prices.