Ministers and MEPs have agreed to cut the surplus of carbon credits by launching a reserve fund, to begin operating in 2019. An overhaul of the emissions trading was outlined in the European Council's energy union framework in February.
The reserve could remove allowances in the event of a surplus and replace them if there are too few.
When the reserve is launched, 900 million "backloaded" and 600 million unallocated carbon allowances would be taken from the market.
The MEPs and the council's Latvian presidency has also agreed to a "solidarity mechanism", which would see 10% of the total annual allowances allocated to central and eastern European states being exempt from the reserve until 2025.
There is also a proposal to make 50 million allowances to fund low-carbon innovation projects. The European Commission will consider this proposal in an upcoming ETS review.
The European Wind Energy Association (EWEA) has supported the reform, arguing the surplus was "suppressing the carbon price and failing to hold Europe's worst polluters to account over their emissions".
But EWEA said the changes could have been bolder. Director of public affairs, Ivan Pineda, said: "Parliament could have been far more ambitious in the shake-up of the carbon market, and much more comprehensive reform is needed in order for this instrument to provide a meaningful signal to investors."
UK utility and renewables developer SSE said: "Yesterday's agreement sends a strong signal to investors that the European institutions are serious about an ambitious EU ETS, and to confirm this signal the institutions should ensure the legislation is adopted as soon as possible without further delay or debate."
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