EDIT: sorry I was refering to torch 2
This one is not allowed, because the torch originally has a solid color behind it - you cannot replace colors with transparency.
I just realised this is not clarified in the rules (but it is in the summary), I'll edit it in.
Yes, that's what you'd use ExGFX for generally.
If you mean mix sprite sets then yes.
You technically cannot recolor transparency, but you can easily overlap a tile with a solid color tile, so it counts as tile merging. So feel free to do it, but don't merge the resulting tile with anything else.