The EU executive will loosen state aid rules and propose a new “European sovereignty fund” later this year, in response to the controversial US Inflation Reduction Act and China’s “unfair” green subsidies. A leaked European Commission plan underscores the global green subsidy race is under way, although EU member states remain divided on how to respond. EU leaders are due to meet next week in Brussels to discuss the bloc’s response to Joe Biden’s $369bn (£300bn) Inflation Reduction Act, which aims to subsidise a vast expansion of green technology, from renewable power to electric cars. European leaders say the IRA discriminates against companies exporting to the US and fear it will lure their firms across the Atlantic, costing jobs and shuttering factories in the crucial green tech sector. While European anger has been most visible against the US, the EU plan is also a response to China, which the commission accuses of using “unfair” and “market distort[ing]” subsidies to advance in the race to produce clean technologies. Chinese subsidies “have long been twice as high as those in the EU, relative to GDP” states a leaked copy of the commission’s “green deal industrial plan” seen by the Guardian. “Europe and its partners must do more to combat the effect of these unfair subsidies and prolonged market distortion.” Earlier this month, the European Commission president, Ursula von der Leyen, said the EU was working with Washington to reduce the “negative side effects” of the IRA on Europe, but added: “Even more significantly we are facing unfair competition in the clean tech sector from China”. The leaked document, first reported by the Financial Times, provides new details on the commission’s plans to loosen the EU’s state aid regime, strict rules that limit government subsidies for industry. Since Russia’s invasion of Ukraine, the commission has twice relaxed state aid rules to help governments struggling to protect companies from soaring energy costs and a weakening economy. The commission wants to extend these flexibilities to help the EU manage the green transition. Simplified state aid rules that already apply to some renewable technologies will be extended to renewable hydrogen and biofuel storage. Significantly EU member states will be able to offer help to EU companies that are being offered equivalent financial aid from foreign governments. This is a direct response to fears that Washington is actively luring European firms to quit Europe and make their clean tech products in the US. But the prospect of a relaxed state aid regime – without any other support – has alarmed southern and smaller European governments that lack the fiscal firepower of the EU’s biggest member states. These fears were compounded by recent commission figures revealing that France and Germany together accounted for 77% of all state aid given to companies during the coronavirus pandemic. Italy’s government has warned that relaxed state aid rules should “not be a free-for-all” and called for a joint EU fund to help green tech in all member states. Meanwhile, fiscal hawks, such as Germany and the Netherlands, argue that the EU has unspent billions for the green transition in its Covid recovery plans, an €800bn (£703bn) fund funded by common borrowing. With much money unspent, they argue it is premature to talk about further joint funds. The leaked paper reveals that the European Commission will propose a European sovereignty fund by the summer, but details remain scant. The European sovereignty fund is intended to preserve “a European edge on critical and emerging technologies”, such as quantum computing, artificial intelligence, biotechnology and clean tech, the paper states. Yet it gives no details on budget or precisely how the fund would be paid for. Elsewhere, the paper notes that the EU’s existing Covid recovery plans have made €250bn available for green measures, including the decarbonisation of industry. But it spells out the scale of the task in removing fossil fuels from the EU’s economy, noting that each year until 2030 an extra €477bn of investment in energy and transport will be required on top of the historical average spend. In a statement the EU’s employers’ association, Business Europe, said the commission had “finally recognised” the urgency to act on Europe’s “worsening” competitiveness. Warning against a subsidy race, the group added: “The answer needs to simultaneously address the push factors resulting from higher energy and regulatory costs as well as lengthy permitting procedures, and counter the financial pull factor created by the IRA. If the EU fails to deliver on all those aspects, we will lose even more ground on global competitiveness.”