Brussels has cleared the way for a subsidy race with the US over crucial technologies, allowing EU member states to “match” multi-billion dollar incentives as they fight to keep projects in Europe.

The overhaul published by the European Commission on Thursday will for the first time justify large-scale public funding for green projects if similar incentives are offered outside Europe, a radical departure in how state subsidies have been policed within the bloc.

The measures will allow states to pump billions of euros into the production of solar panels, batteries, wind turbines, electrolysers and heat pumps. “This is quick and dirty money to match the Americans,” said one person involved in the development of the plan.

The EU has been racing to find ways to cope with the US Inflation Reduction Act, a package that includes $369bn of subsidies and tax credits for clean energy technologies.

Anxiety over companies being luring away from Europe was heightened this week when Volkswagen, Europe’s largest carmaker, put on hold plans for a battery plant in the continent. It is awaiting an EU response after estimating it could receive €10bn in US incentives.

The subsidy plan was unveiled as Ursula von der Leyen, the commission president, prepared to meet US president Joe Biden in Washington. The leaders are expected to discuss Europe’s requests for its companies to be granted benefits under the IRA, which will offer big subsidies to businesses investing in green technologies in the US.

The EU’s state aid regime, which has evolved over 60 years, was designed to avoid costly subsidy races that pitted one member state against another. But it has been significantly relaxed during the financial crisis and the pandemic to allow massive public support for the economy.

Some lawyers fear the latest measures, which the commission calls “temporary”, will prove costly for the public. “This is the subsidy race nobody wants,” said one veteran adviser on state aid applications. “In the short term companies will have the incentive to see who can give them better terms but it’s ultimately the taxpayer who will bear the burden.”

The state aid guidelines impose some conditions. Brussels will allow EU countries to match such subsidies up to the point where the project would be financially viable in Europe, an effort to prevent public money from inflating companies’ profits.

Any application to “match” US incentives must be from one member state in a less wealthy region or from a group of three countries, where at least two are in a less developed area.

This condition follows criticism from southern and eastern member states that, by relaxing state aid rules, the commission would in effect allow the wealthiest countries, notably Germany and France, to subsidise their industries to the detriment of others.

The new regime allowing matching subsidies, which can be either cash or tax breaks, will be open until 2025. But subsidies for approved projects can run for much longer time periods.

A second part of the reforms will ease rules for smaller projects, which will now be reviewed in a matter of weeks to match the speed at which money is handed out by the US, according to officials.

These projects will be subject to an increased subsidy ceiling of up to €350mn for projects in less wealthy regions and those in wealthier areas will be eligible to receive subsidies of up to €150mn.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here.

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here