European Union flags flutter outside the European Commission headquarters in Brussels, Belgium, June 5, 2020. REUTERS/Yves Herman/File Photo

BRUSSELS, July 28 (Reuters) - The European Union will shrink the supply added to its carbon market next year, as it presses ahead with reforms to strengthen Europe's main policy for curbing greenhouse gas emissions, the European Commission said on Friday.

The EU carbon market requires power plants, industrial facilities and airlines to buy CO2 permits when they pollute - providing a financial incentive to emit less planet-warming carbon dioxide.

The EU caps the total number of permits added to the market each year. That cap decreases each year, to make sure emissions gradually decrease.

A total of 1,386 billion CO2 permits will be added to the EU carbon market next year, the Commission said, down from the 1.486 billion permits added this year.

EU countries agreed reforms to strengthen the carbon market last year to deliver climate change goals, including by shrinking the supply of permits in the scheme faster. The reforms will also impose two extra, one-off cuts to the supply of permits, the first in 2024.

Next year will also see the EU force ships to buy CO2 permits for the first time.

Next year's supply includes 78.4 million new CO2 permits that will be added to the market to reflect the inclusion of the shipping sector, the Commission said.

Analysts expect carbon prices to increase in the coming years as the tougher reforms kick in and CO2-emitting companies compete to buy a smaller pool of permits.

Benchmark EU carbon permits traded on Friday afternoon at around 89 euros per tonne of CO2.