Romania and Bulgaria - but not Poland - will be allowed to use money from an EU fund to modernise their coal-fired power plants, negotiators from the EU institutions agreed early on Thursday (9 November), according to three sources who were in the room.

The eligibility criteria for receiving grants from the Modernisation Fund was one of the main sticking points in the talks over the reform of the EU's emissions trading system (ETS).

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The European Parliament, on one side, did not want to fund any projects related to coal, which is the fossil fuel that emits the most CO2 per unit of electricity.

The Council of the EU, however, had to find a balance between the 28 member states it represents.

Several eastern EU countries are still very much reliant on energy from dirty coal-fired power plants. In particular Poland had been vocal on wanting to have the option to use the fund to finance projects related to coal.

The three sources told EUobserver that a compromise was found by saying that no solid fossil fuels can be financed - with one exception.

Only countries whose national GDP are below a certain percentage of the EU average would be eligible to finance projects that would modernise coal-fired power plants by making them more efficient, and hooking them up to district heating systems.

The percentage – somewhere between 30 or 35 percent, the sources gave different accounts – was chosen so that only Romania and Bulgaria would fall into that category.

This way, Poland would be isolated in its position.

"Poland will be angry," one source said.

Another added that Poland probably would have been against the compromise agreement anyway – when the Council agreed its common position in February, Poland had voted against it.

The legislation, proposed in 2015, needs approval from a majority in the European Parliament, and a so-called qualified majority in the Council. Poland can be outvoted.

Carbon credits

The exceptions will be available only to a limited share of the fund, which is not denominated in euros, but in carbon credits called allowances.

These allowances are at the heart of the ETS: over 11,000 thousand emitters in the industry and energy sectors are required to hand in allowances for every tonne of CO2 they emit.

The proceeds of the sale of those allowances will go into several funds, of which the Modernisation Fund is one of them.

The Modernisation Fund will distribute 310 million allowances between the ten poorest EU countries. Only 16 million of those will be available for district heating projects in Romania and Bulgaria.

Under the current ETS price of around €7.70 per tonne CO2 that would amount to around €123 million. But if the ETS price increases to for example €20 – which the lawmakers are hoping for to increase the incentive to become cleaner – the pot of money becomes €320 million.

The eligible projects should lead to "sustainable and efficient district heating", the agreed text reportedly said.

District heating is a substantial source of heat in residential homes in several eastern EU countries.

Offsetting

Two sources said that if Romania or Bulgaria were to decide to apply for projects from the Modernisation Fund, which is seen as "EU money", they would also have to finance fully clean projects from a separate pot of allowances that is distributed to each member state, i.e. "national money".

For example: if one of the two countries were to apply for a district heating project worth 10,000 allowances, they would also have to set up a climate-friendly (i.e. non-coal) project worth that same amount from their own pot of allowances, in what one source called a way of "offsetting" the coal-related project.

Late night deal

The negotiators started their talks at 6PM on Wednesday and reached their deal shortly before 4AM on Thursday.

"ETS needs reform to remain effective and deliver our climate goals. We believe that the preliminary agreement ensures that," said Annikky Lamp, spokeswoman for the Estonian presidency of the Council, which during this six-month period chairs Council meetings.

She said the presidency will inform the national governments' EU ambassadors on Friday and "present the text for the final agreement as soon as possible".

Because that text has not yet been presented, a spokeswoman for Poland's permanent representation in Brussels did not want to comment.

Green criticism

Environmental groups criticised the deal on Thursday morning.

"Policymakers left the door open for billions of EU ETS money to be potentially used on ageing coal power plants, which not only violates the spirit of the Paris Agreement but also puts lives at risk by fuelling the air pollution crisis," said Carbon Market Watch in a press release.

Climate Action Network Europe said the EU "allowed its flagship climate tool to continue subsidising coal plants".

"The backdoor for funding coal through the ETS in countries in a dire need of transition remains open," it added.

Surprise

Members of the European Parliament were "completely surprised" with the Estonian compromise solution on Romania and Bulgaria, said Gerben-Jan Gerbrandy, a Dutch MEP from the Liberal group, who was involved in the talks.

"We were convinced that the Council was trying to please Poland," he said.

He also downplayed the importance of the share of the fund that will go to coal-related district heating.

"It does not amount to a whole lot, in absolute numbers," he said.

Gerbrandy told EUobserver he thinks that both in the parliament and in the council, majority support can be expected.

"There is something in there for everyone," he said.

This article was updated 9 November 17:08 to include quotes from MEP Gerbrandy