Brazil’s senate approves tax credit rules for green hydrogen

The Brazilian senate has approved a bill that creates rules for the country’s low-carbon hydrogen development program (PHBC).

The rules were initially part of the low-carbon hydrogen regulatory framework bill but that part was vetoed by President Luiz Inácio Lula da Silva due to a lack of agreement with lawmakers, and a separate bill had to be drafted.

The PHBC bill now awaits the presidential rubber stamp to become law.

“With this approval, Brazil is preparing to consolidate a regulatory framework for the development of low-carbon hydrogen, which is essential for the energy transition and alignment with sustainability goals,” Bianca Bez, legal director at local hydrogen and sustainable fuels association ABHIC, told BNamericas. 

The PHBC will grant tax credits for the sale of low-carbon hydrogen and its derivatives produced in the country.

The total tax credit amount that can be granted between 2028 and 2032 will be 18.3 billion reais. The annual credit limits will be: 1.7bn reais in 2028; 2.9bn in 2029; 4.2bn in 2030; 4.5bn in 2031; and 5bn in 2032.

Priority for incentives will be given to industrial sectors that are difficult to decarbonize, such as fertilizers, steel, cement, chemicals and petrochemicals. Another objective will be to promote the use of hydrogen in heavy transport, such as maritime operations.

If the funds are not used in one of those years, it can be reallocated in subsequent years until 2032. Each year, the executive branch must disclose the total granted and used as well as their beneficiaries.

Bez said that oil and gas regulator ANP will need to come up with specific regulations to implement the new legislation. 

One of the regulatory demands, according to Bez, is to develop technical standards for the production, storage and distribution of green hydrogen. 

ANP could use public consultations to obtain market feedback in a bid to ensure that the regulation is comprehensive and balanced, Bez said.

She also pointed out that the regulation needs to consider compliance costs for market players, potentially influencing the final price of hydrogen and the competitiveness of the sector. 

“Excessively restrictive regulation can discourage investment, while lax regulation may not guarantee the desired safety and sustainability standards,” Bez said.

Leandro Zannoni, director of regulations at ABHIC, said that ANP will be responsible for issuing authorizations for hydrogen production, while considering the domains of other regulatory agencies depending on the sources used in the production process. 

“It’s therefore essential that the federal government issues a regulation defining the powers of the regulatory agencies,” he told BNamericas. 

THE TRICKY PART 

It will not be an easy task to create a regulation that is flexible enough to accommodate new technologies and production methods, while at the same time ensuring good coordination between multiple agencies to avoid regulatory overlaps or gaps, according to Bez.

She also pointed out that establishing a new regulatory regime implies significant costs in terms of implementation and oversight. 

“These costs need to be minimized to avoid negative impacts on the market and consumers,” Bez said.

Zannoni said that ANP will need to develop specialized technical expertise to properly regulate the hydrogen production chain. 

“Companies probably have more information about costs, production capacity and market practices. This makes it difficult to implement regulatory decisions that are effective as the lack of accurate information can lead to under- or over-regulation,” he said. 

Another challenge is to harmonize it with international standards for the production, certification, and marketing of hydrogen so that Brazil can become a competitive exporter. 

“The ANP needs to guarantee this harmonization, especially in relation to sustainability and the traceability of the hydrogen life cycle,” said Zannoni.