* Degree of backloading for CO2 emissions needed - Merkel
* She says rise in prices would help modern gas-fired plants against coal (Adds quotes, detail, market reaction)
By Andreas Rinke
HANOVER, Germany, Oct 16 (Reuters) - German Chancellor Angela Merkel voiced support on Wednesday for EU plans to prop up carbon prices by temporarily removing some of the surplus allowances weighing on the bloc's emissions trading market that is meant to fight climate change.
German support for the plan to withdraw 900 million permits, a process known as backloading, is needed for a law to pass.
The proposal has been stalled for months as Berlin withheld its backing due to differences within Merkel's outgoing centre-right government.
Although there is added uncertainty over German policy as Merkel tries to form a new coalition following last month's election, the carbon and power markets both rose in expectation that Merkel's stance made backloading more likely.
"We need a degree of backloading of CO2 emissions so that the certificate price can reach a reasonable level again," Merkel told a union event in the city of Hanover.
She said a rise in certificate prices would help modern, flexible gas-fired power stations which were now struggling to compete with coal-fired plants, which emit many more carbon emissions, because carbon permit prices were now so low.
The EU benchmark carbon price was up nearly 8 percent at 5.35 euros a tonne at 1301 GMT, after Merkel spoke.
Merkel's comments and the resulting rise in carbon prices, which raises electricity generation costs, affected the German wholesale power market, where contracts for baseload (24 hours) delivery in 2014 rose around two percent to 38.10 euros per megawatt hour.
The European Commission plan to withdraw carbon permits from its Emissions Trading System (ETS) is aimed at lifting prices depressed by over-supply and an economic downturn.
Lithuania, which holds the EU presidency, said on Monday it was confident the plan would proceed soon after "optimistic signals" from members states at a ministerial meeting.
German environment minister Peter Altmaier said there that Germany was finalising its position on backloading, implying the government could adopt a formal view before it leaves office.
Altmaier, a member of Merkel's conservatives, has long voiced support for the proposals but Germany's economy minister, a member of Merkel's junior coalition partner which was voted out of parliament in the September election, had opposed them.
The two ministers were jointly responsible for energy policy and the departure of the pro-business Free Democrats (FPD) is likely to make it easier for Merkel to support backloading.
CO2 REDUCTIONS?
In Hanover, Merkel also said Europe needed a carbon dioxide (CO2) reduction goal for 2030.
"Without such a European goal there will be no investment in power stations in the future because nobody will know exactly how it will develop," Merkel said.
EU regulators are considering doubling the bloc's target to cut greenhouse gas emissions by 2030 and setting a tougher binding goal for renewable energy use, EU sources said in September.
The Commission, the EU executive, outlined new targets earlier this year but has yet to make a firm legislative proposal.
Merkel reiterated that amending Germany's renewable energy law, aimed at boosting green power, will be a priority for a third term but that German industry had to be protected.
"We need clean, safe but also affordable energy. We want to expand renewable energy but it must happen in such a way as not to put at risk Germany's industrial position."
Because the incentives for green power have become so popular, the cost of a surcharge added to consumers' power bills to finance them has risen sharply, pushing up bills for households and consumers.
Merkel faces a delicate balancing act to reduce incentives for green energy sufficiently to lower electricity costs while keeping up the renewables boom in Europe's biggest economy.
Merkel is in exploratory talks with the centre-left Social Democrats (SPD) about forming a government but any coalition deal could take weeks and Merkel's energy shift to renewables and away from nuclear energy will be high on the agenda.
Merkel said the government would have to look at which energy intensive companies need exemptions from the surcharge to remain internationally competitive.
She said Germany would have a "real problem" if the European Union launched a case against exemptions from the surcharge, arguing it amounted to state aid. (Additional reporting by Stephen Brown and Nina Chestney and Henning Gloystein in London; Writing by Madeline Chambers; Editing by Anthony Barker)
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