UPDATE 2-Germany agrees "art of the possible" climate action plan without blowing budget

By Holger Hansen and Markus Wacket

* Package includes carbon pricing scheme

* Allows for more stringent measures in future

* Plan is worth over 54 bln euros to 2023

* But package will be financed without new debt

* Environmental groups criticise lack of ambition (Recasts with Merkel news conference, reaction)

By Holger Hansen and Markus Wacket

BERLIN, Sept 20 (Reuters) - Chancellor Angela Merkel's ruling coalition agreed a package of budget-neutral measures on Friday to protect the climate and restore its green credentials, but drew criticism from environmental groups which had hoped it would go further.

Merkel's conservatives and their Social Democrat (SPD) coalition partners negotiated overnight to reach agreement on a plan by Friday's self-imposed deadline. They were spurred into action by a surge in support for the Greens but did not want to burden industry at a time when the economy may already be in recession.

Clinching a compromise was seen as essential to hold together the awkward 'grand coalition' of the conservatives and left-leaning democrats.

Both camps put a positive spin on the package, which includes a new domestic carbon pricing scheme, bigger incentives for buying electric cars, higher road tolls for trucks from 2023, surcharges on domestic flights and plans to pump money into rail operator Deutsche Bahn.

"Politics is what is possible," Merkel told a news conference after 19-hour marathon talks.

"It was intense, but it was constructive and at times it was a pleasure to wrestle over the right path," she said of the negotiations, presenting a united front with SPD Finance Minister Olaf Scholz.

The package is worth more than 50 billion euros ($55 billion) through to 2023, but will be budget neutral - meaning Berlin will not take on new debt to finance the measures.

The government had faced calls from economists to use the environmental challenge as a reason to spend heavily on a big climate plan after years of fiscal prudence, but Merkel said the ruling coalition would stick to its balanced budget policy.

"We remain committed to the black zero (policy of no fiscal deficits)," she said.

As she spoke, more than 80,000 people in Berlin joined the Fridays for Future demonstrations inspired by Swedish child activist Greta Thunberg, organisers of the gathering said.

Under the plan, Germany will introduce a carbon dioxide emission price for transport and heating in buildings from 2021, starting at 10 euros a tonne. It will double to 20 euros in 2022 and then rise by 5 euros each year to reach 35 euros in 2025.

That starting price, lower than the 40 euro price many climate economists had been advocating, means pressure on German companies to cut emissions will be lower too.

"The carbon price could have been higher," Dirk Messner, incoming president of Germany's Environment Agency, told Reuters, adding that politicians would have to be more ambitious in the coming years to tackle climate change.


"CAPITULATION"

Merkel, who acknowledged her coalition's credibility on climate policy had been hurt by abandoning a self-imposed 2020 emissions cut target, said the government would review its progress annually and take additional measures if needed.

"The chances are very good, they have grown, that we will reach our climate goals this time, better than with the 2020 target," Merkel said. "If we should realise we're not on track, then we will correct this."

But environmental groups criticised the government's lack of ambition.

"This mixture of despondency, postponement, and failure is not an acceptable result," said Christoph Heinrich of the World Wide Fund for Nature. Greens lawmaker Lisa Badum called the plan "a capitulation".

A poll for public television ahead of Friday's announcement showed 63 percent of Germans thought protecting the climate was more important than economic growth.

Finance Minister Scholz said the package was "about taking climate change as an opportunity to modernise our economy and to create lots of jobs with promise for the future."

But the VDMA engineering association said the carbon pricing levels set by the government were too low to encourage investment in new technologies. ($1 = 0.9082 euros)

(Additional reporting by Thomas Escritt and Michael Nienaber Writing by Paul Carrel editing by Elaine Hardcastle)