(Bloomberg) -- The European Union is considering easing restrictions on state aid for clean tech products, as the bloc seeks to support companies and counter a US climate law.

A plan pushed by Internal Market Commissioner Thierry Breton would open the door to aid for products like solar panels and batteries, similar to how the EU allowed subsidies for the production of semiconductors last year, according to people familiar with the matter. This idea, called a “Clean Tech Act,” could also include changes to permitting rules.

In the more immediate term, Breton wants to adjust state aid rules to help various industries grapple with energy costs and counter US subsidies. The EU’s competition chief Margrethe Vestager said Friday that Germany and France have benefited the most from state aid allowed under existing rules that provide aid for companies to grapple with high energy costs. 

“Not all member states have the same fiscal space for state aid,” Vestager wrote in a letter sent to EU countries’ finance ministers seen by Bloomberg. “That’s a fact. And a risk for the integrity of Europe.”

Breton has been on a campaign to various European capitals to bring prime ministers on board with his vision of a plan that would rival the US Inflation Reduction Act. European officials argue the US legislation discriminates against European companies and could lure investment to the US.

EU officials have become increasingly skeptical about the US offering any major concessions to the IRA to benefit European companies. Some still hope for changes in March that could allow raw materials for batteries to qualify under the US law, but officials have acknowledged that the amount of subsidies will be difficult to counter whatever changes are made to the IRA.

The European Commission, the EU’s executive arm, is under pressure to present an analysis of which industries in Europe could warrant more subsidies at a meeting of the bloc’s leaders in Brussels on Feb. 9-10, with a more concrete plan to come in March.

Controversy Due

Breton’s vision – which would require changes to state aid rules and raising EU funds – is expected to be controversial among capitals and with colleagues in the commission. Many fear new subsidies will merely benefit France and Germany and lead to a subsidy race to the bottom with the US.

One of the most controversial debates will be how to raise money to ensure the entire bloc benefits from clean tech investments.

Six countries — Denmark, Finland, Ireland, the Netherlands, Poland and Sweden — have already urged the commission to exercise great caution when changing the EU’s temporary crisis framework in a letter seen by Bloomberg. 

“State aid for the mass production and commercial activities can lead to significant negative effects including the fragmentation of internal market, harmful subsidy races and weakening of regional development,” the letter said. “These harms can be greater than the positive effects.”

Commission President Ursula von der Leyen’s team has indicated support for making state aid rules more flexible and looking into ways of providing more EU funds, according to people familiar with the matter. Von der Leyen doesn’t exclude the use of trade defense instruments concerning the IRA if necessary, according to a commission official familiar with her thinking, as some member states supported considering.

Vestager announced in her letter an immediate revision of the General Block Exemption Regulation, which allows EU countries to grant higher amounts of state aid without having to notify the commission. She wants to boost the EU’s RePowerEU plan, and set up a collective European fund “to support countries in a fair and equal way.”

State Aid Backing

Countries like France and possibly Germany are willing to raise EU funds. Some countries have backed the idea that state aid, permitting and procurement procedures need to be simpler, faster and more flexible to support the production of batteries, solar cells, hydrogen, wind turbines, EU officials said.

Sweden, which holds the rotating presidency of the EU, is poised to be critical of any plan that would include new money. A Swedish government official wanted a pragmatic approach that could include permanent changes to state aid but not as far as Breton might want.

The official backed more subsidies for specific industries like batteries and critical materials. Funds to support member states come from existing EU money, including the recovery fund, margins of the EU’s budget or cohesion funds, or through European Investment Bank.

Energy Costs

Breton first wants to cover companies’ operating expenses to help deal with a massive spike in energy costs that followed Russia’s invasion of Ukraine.

This money — which would help a variety of industries from chemical companies to semiconductors — would require a change to the existing temporary framework to support companies faced with record-high energy prices, and could be further supported by a program similar to the EU’s SURE program, that provides money to mitigate unemployment risks, and EIB loans.

Vestager also is looking at ways to amend the temporary framework, asking ministers how they want to balance allowing more flexibility to invest in clean tech with the “negative effects of state support for mass production,” which could lead to “harmful subsidy races” within the EU and other countries and “possible negative effects on cohesion” within the EU.

Vestager proposed making the calculation of state aid simpler and the approval faster, which could include all renewable energy technologies. Vestager also will introduce new aid to prevent companies from relocating. This aid would help fund production facilities for key green sectors, possibly with tax breaks.

“These new provisions aim to counter the risk that investments might be unfairly diverted to third countries outside Europe,” Vestager wrote. These changes might go beyond what is allowed in the regional aid guidelines, so they should be time-limited, targeted to sectors “where such need really exists” and proportionate.

France wants a SURE-like instrument also to support companies as part of a short-term response to IRA, according to a paper seen by Bloomberg. This would imply joint borrowing to raise the funds in the markets.

After Russia’s invasion of Ukraine, the EU created a temporary framework to support companies faced with record-high energy prices. The commission approved €525 billion ($567 billion) worth of state aid by the end of November.

(Updates with warning letter from six EU nations in 10th paragraph)

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