Leaked European Union proposals reveal the bloc is to expand state aid rules in an effort to counter US green energy subsidies and unfair competition from China that are threatening European industry. The EU is to present its proposals on Wednesday.
President Joe Biden's landmark spending law for $370 billion in subsidies for its energy transition, including tax cuts for US-made electric cars and batteries.
EU leaders will meet in Brussels next week to discuss the bloc's response to the legislation, the Inflation Reduction Act, which they say discriminates against companies exporting to the US.
It is feared the IRA will lure European firms across the Atlantic, costing jobs and shuttering factories in the crucial green tech sector.
However loosening EU state aid rules has divided EU nations because less wealthy states would not be able to pour big money into businesses, leaving the single market fragmented.
The European Commission's leaked response was worked out against a backdrop of disagreement on how best to protect Europe's businesses, and fears of triggering a trade war.
EU Commission President Ursula von der Leyen said the EU was pushing Washington to make exemptions for European companies, adding that: "Even more significantly we are facing unfair competition in the clean tech sector from China".
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A significant point of contention is a new sovereignty fund proposed by EU Commission President Ursula von der Leyen but opposed by some members including Denmark and Finland.
Draft proposals seen by AFP suggest the fund idea will be jettisoned in the short term but state aid rules will be extended to the green technology sector.
The bloc's 27 members have already committed 250 billion euros to the green transition in national recovery plans.