HAMBURG (Reuters) - German Chancellor Angela Merkel said on Friday economic growth assumptions behind the European Union's carbon permit trading system no longer applied and action should be taken about backloading supply in the market after September's election.
The news of Merkel's first cautious backing for reform seeking to boost prices in the EU's flagship emissions trading system (ETS) sent carbon prices sharply higher, as traders interpreted it as likely support for the passing of the plan.
December delivery carbon emissions allowances were at 3.43 euros a ton at 1141 GMT, up 11 percent.
"All of the assumptions about trading certificates no longer apply," Merkel said at a church event in Hamburg, adding that growth estimates had been over-optimistic and a Europe-wide downturn led to shrinking demand for permits and falling prices.
Merkel did not specify what should be done about backloading but said it should be twinned with a reform of Germany's renewable energy law which generously subsidizes green energy.
This would not be possible before September's federal election but should be done very quickly afterwards, she added.
Her environment and economy ministers' failure to agree with each other on a common stance for backloading at European level contributed to its initial rejection by the European Parliament.
The highly political issue is being pursued further by the European Commission. But German inaction may mean attempts to rescue the market drag on.
Commission estimates put the necessary ETS carbon price at 20 euros to be able to drive investment in clean technologies.
Because of failings in the ETS, there are now mismatches in the market whereby heavily CO2-polluting coal-to-power stations work profitably while gas burning technology, which is cleaner, has become too expensive.
"This cannot be right, we have to restore some form of order," Merkel said, adding that another problem of low prices was that an ETS-financed German instrument to support climate protection measures was underfunded.
Germany's shift away from nuclear and fossil fuels towards emission-free technology was being watched worldwide, she said, adding: "Its success has a significance far beyond Germany."
(Reporting by Andreas Rinke; writing by Stephen Brown and Vera Eckert; editing by Keiron Henderson)
(This story was refiled to drop reference to European legislation in the eighth para)