The commission, the EU's executive arm, said the new rules will apply until the end of 2025 and, in "exceptional cases", allow members to match subsidies provided in other countries "where there is a real risk of investments being diverted away from Europe".
While it does not want to spark a subsidy race, the EU fears businesses will be tempted by state aid and lower energy costs in Asia and North America and opt to relocate.
Last year, Washington passed the landmark Inflation Reduction Act (IRA) that offers lavish advantages for US purchasers of electric vehicles if they "Buy American".
The announcement comes a day before Commission chief Ursula von der Leyen will meet US President Joe Biden in Washington on Friday to discuss several topics including trans-Atlantic trade friction.
Brussels is eyeing a trade agreement with the United States that would allow the EU to access some benefits of US President Joe Biden climate plan.
German carmaker Volkswagen on Wednesday said it would "wait and see" how the EU responds to the IRA before moving ahead with a planned battery plant in eastern Europe.
The EU hopes the new measures will support investment in technology such as batteries, solar panels, wind turbines, heat-pumps, carbon capture usage and storage as well as for production and recycling of related critical raw materials.
Loosening subsidy rules does not, however, enjoy unanimous support in EU capitals.
The commission worked on the response against a backdrop of disagreement among member states on how best to protect Europe's businesses, and fears of triggering a trade war.
Some member states, including France, support state aid expansion but other countries say it only helps nations with deep pockets and risks fragmenting the single market.
The EU's competition chief Margrethe Vestager insisted in a statement that the new rules were "proportionate, targeted and temporary".
Germany and France represent respectively 53 and 24 percent of state aid notified to Brussels since March 2022, when the rules were relaxed following the war in Ukraine.
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