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The Legal Framework for Low Carbon Hydrogen in Brazil

13/08/2024
Summary

On 2 August 2024, Bill No. 2308/2023 (“Bill“), which establishes the legal framework for low-carbon hydrogen in Brazil, was approved with a partial veto. Numbered as Law 14948/2024 (“Law“), it has created the National Low-Carbon Hydrogen Policy, which will form part of the country’s National Energy Policy. The Law has also established the competence of the National Agency for Oil, Natural Gas and Biofuels (ANP) to authorize, regulate and inspect activities in the low-carbon hydrogen value chain, and has created the Brazilian Hydrogen Certification System (SBCH) and the Special Incentive Regime for Low-Carbon Hydrogen Production (“Rehidro“), a tax regime designed to foster technological and industrial development, competitiveness and added value in national production chains.

The Bill originated in the House of Representatives, where it was approved in November 2023. In the Senate, the text was subjected to 45 amendments and intense debate. Approved in the Senate in July 2024, the text returned to the House of Representatives for a final re-examination, where it was approved in July 2024 and submitted for presidential approval. The President vetoed six articles related to the Low-Carbon Hydrogen Development and Investment Program (PHBC), a program to grant tax credits for the sale of low-carbon hydrogen and its byproducts produced in the country. The vetoed articles are now a part of a new bill of law, which will be examined and voted by Congress.

We highlight the main points of the Law, already in force as of the date of its publication, below.

  • Definition of hydrogen

The Law establishes the following definitions of hydrogen, from the most generic to the most specific:

Low-carbon emission hydrogen” means “fuel or industrial input collected or obtained from different sources in the production process and which has GHG emissions, according to life cycle analysis, with an initial value less than or equal to 7kgCO2eq/kgH2 (seven kilograms of carbon dioxide equivalent per kilogram of hydrogen produced).”

Renewable hydrogen” means “low-carbon emission hydrogen, fuel or industrial input collected as natural hydrogen or obtained from renewable sources, including hydrogen produced from biomass, ethanol and other biofuels, as well as electrolytic hydrogen, produced by electrolysis of water, using renewable energies such as solar, wind, hydraulic, biomass, ethanol, biogas, biomethane, landfill gas, geothermal and others to be defined by the public authorities.”

Green hydrogen” means “hydrogen produced by electrolysis of water, using renewable energy sources, such as those provided for in item XIII of this heading, without prejudice to others that may be recognized as renewable.” The renewable energy sources provided for in item XIII are the same referenced in the definition of “renewable hydrogen.”

  • Rehidro

With the aim of encouraging competitiveness and technological and industrial development, the Law has implemented Rehidro.

Legal entities may enroll as a beneficiary of Rehidro if, within five years from 1 January 2025, they are qualified to produce low-carbon hydrogen. The Law also considers legal entities that are already active in the production of low-carbon hydrogen at the time of publication of the regime to be eligible.

In addition, a qualified legal entity that carries out the business of packaging, storing, transporting, distributing or marketing low-carbon hydrogen, that generates renewable electricity for the production of low-carbon hydrogen and meets the criteria laid down by the Law, or that produces biofuels (such as ethanol, biogas or biomethane) for the production of low-carbon hydrogen, may apply for Rehidro on a co-qualification basis.

The main incentive instrument set up by Rehidro is the suspension, for five years from 1 January 2025, of the levying of PIS/Pasep and Cofins on activities related to low-carbon hydrogen carried out by its beneficiaries.

  • Brazilian Hydrogen Certification System — SBCH

Another important topic of the Law is the establishment of the Brazilian Hydrogen Certification System, which may be voluntarily adopted by hydrogen producers (or producers of hydrogen byproducts in the national territory). In terms of governance, in addition to the producer and the buyer, the competent regulatory authorities are part of this system, as well as certifying companies, accrediting institutions and registry managers, with their respective duties established in the Law.

The certificate to be issued will aim to inform the intensity of the emissions related to the hydrogen production chain.

  • Regulatory competence

The Law provides that the production of hydrogen, its byproducts and carriers will be carried out by authorized companies or consortia of companies incorporated under Brazilian law, with headquarters and administration in the country. However, the authorization may be waived in certain cases to be provided for under the regulation, especially with regard to the volume produced and the use of hydrogen as an input.

The Law establishes the competence of the ANP to regulate, authorize and inspect the exploration and production of low-carbon hydrogen, while respecting the powers of other regulatory agencies, within the limits of the sources used in the hydrogen production process. The ANP will also be able to use the so-called regulatory sandbox (or experimental regulatory environment) to prepare the regulations and is authorized by the Law to adopt individual solutions until the sector’s specific regulation is issued.

The National Electric Energy Agency (ANEEL) will be responsible for (i) offering contributions to the ANP for regulating the sector and (ii) issuing the declaration of public utility for the areas necessary for the electric energy transmission and the distribution facilities of restricted interest of the granting agent that are not intended for access to the transmission or distribution national system, provided that they are dedicated to the exclusive supply of low-carbon hydrogen production projects.

  • Veto of the PHBC

The original text approved by Congress provided for the establishment of the PHBC, granting tax credits to buyers and producers of low-carbon hydrogen, which would amount to BRL 18.3 billion by 2032. Originally, the text provided that the credits granted would be related to the Social Contribution on Net Profits (CSLL).

However, while the bill was under discussion in Congress, the articles that provided for tax credits to be linked to the CSLL were removed. Thus, under the justification violating budgetary and fiscal rules, the Law was approved with a partial veto on articles 30 to 35, all of which referred to the PHBC.

According to the constitution, the House of Representatives and the Senate have 30 days to decide together whether to uphold the vetoes. The deadline is 1 September 2024.

  • Proposed Bill 3027/2024 — Adjustment of the PHBC

As an alternative to the gap left by the presidential vetoes, an agreement was reached between Congress and the federal government to propose a new bill dealing exclusively with the PHBC.

Bill No. 3027/2024 was proposed by congressman José Guimarães (PT/CE) on 2 August 2024 and is currently being debated by the House of Representatives.

According to the wording of Bill No. 3027/2024, a total of BRL 18.3 billion in tax credits could be distributed between 2028 and 2032, based on the following overall limits:

2028 — BRL 1.7 billion

2029 — BRL 2.9 billion

2030 — BRL 4.2 billion

2031 — BRL 4.5 billion

2032 — BRL 5 billion

Bill No. 3027/2024 states that the Executive Branch will be responsible for defining the amount of tax credits that will be granted to projects, considering the fiscal goals and objectives of the program for each calendar year. It also establishes that the granting of credits will be preceded by a competitive procedure, in which only previously qualified projects will be able to participate, under the terms of the regulations.

Bill No. 3027/2024 also restores the requirements originally set out in Bill No. 2308/2023 for low-carbon hydrogen projects to be eligible for PHBC tax credits:

I – Contributing to regional development

II – Contributing to mitigating climate change and adaptation measures

III – Stimulating technological development and dissemination

IV – Contributing to the diversification of the Brazilian industrial park

Bill No. 3027/2024 was approved by the House of Representatives on August 12, 2024 under urgent procedure. The bill will be sent to the Senate and, if approved, will follow for final presidential approval.

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