brief
On August 2, 2024, Law No. 2308/2023 (“bill” Bill, which sets the legal framework for low-carbon hydrogen in Brazil, was approved after a partial veto. Numbered Law 14948/2024 (“lawThe law also establishes the competences of the National Agency of Petroleum, Natural Gas and Biofuels (ANP) to authorize, regulate and inspect activities in the low-carbon hydrogen value chain and creates the Brazilian Hydrogen Certification System (SBCH) and the Special Incentive System for the Production of Low-Carbon Hydrogen (“Rehydrogen“), a tax system aimed at promoting technological and industrial development, competitiveness and added value of the national production chain.
The bill originated in the House of Representatives and was approved in November 2023. In the Senate, the bill went through 45 amendments and intense debate. The bill was approved in the Senate in July 2024 and then sent back to the House of Representatives for final re-examination, where it was approved and sent to the President for approval in July 2024. The President vetoed six provisions related to the Low-Carbon Hydrogen Development and Investment Program (PHBC), which aims to provide tax credits for the sale of low-carbon hydrogen produced in the country and its by-products. The vetoed provisions are now part of the new bill, which will be reviewed and voted on by Congress.
We have highlighted below the key elements of the law that will take effect from the date of publication.
The law defines hydrogen as follows, from most general to most specific:
“Low-carbon emission hydrogen” Refers to “fuels or industrial inputs collected or obtained from different sources during the production process, whose greenhouse gas emissions, based on life cycle analysis, are initially less than or equal to 7kgCO2eq/kgH2 (seven kilograms of carbon dioxide equivalent per kilogram of hydrogen produced).”
“Renewable Hydrogen” Refers to “low carbon emission hydrogen, fuel or industrial input collected in the form of natural hydrogen or obtained from renewable energy, including hydrogen produced from biomass, ethanol and other biofuels, and electrolytic hydrogen produced by electrolysis of water, using renewable energy sources such as solar, wind, hydro, biomass, ethanol, biogas, biomethane, landfill gas, geothermal and other renewable energy sources as defined by public authorities.”
“Green Hydrogen” Means “hydrogen produced by electrolysis of water from renewable energy sources, such as those specified in item XIII of this title, without prejudice to other sources of energy that may be considered renewable energy.” The renewable energy sources specified in item XIII are the same renewable energy sources referenced in the definition of “renewable hydrogen.”
In order to promote competitiveness and technological and industrial development, the law implements Rehidro.
Legal entities can be registered as beneficiaries of Rehidro if they are qualified to produce low-carbon hydrogen within five years from January 1, 2025. The law also considers legal entities that are already actively producing low-carbon hydrogen at the time of the regime to be eligible.
In addition, eligible legal entities engaged in the packaging, storage, transportation, distribution or marketing of low-carbon hydrogen, producing renewable electricity for the production of low-carbon hydrogen and meeting the criteria set out in the law, or producing biofuels (such as ethanol, biogas or biomethane) for the production of low-carbon hydrogen may apply for Rehidro on a common qualification basis.
The main incentive established by Rehidro is the suspension of PIS/Pasep and Cofins taxes on low-carbon hydrogen-related activities carried out by beneficiaries for five years from January 1, 2025.
- Brazilian Hydrogen Certification System — SBCH
Another important theme of the law is the establishment of the Brazilian Hydrogen Certification System, which can be adopted voluntarily by hydrogen producers (or producers of hydrogen byproducts within the national territory). In terms of governance, in addition to producers and buyers, the competent regulatory agency is also part of the system, as well as certification companies, certification bodies and registration managers, and the law defines their respective responsibilities.
The certificate to be issued is intended to inform about the emissions intensity associated with the hydrogen production chain.
The law stipulates that the production of hydrogen, hydrogen by-products and carriers will be carried out by authorized companies or consortiums of companies established under Brazilian law, whose headquarters and administrative institutions are located in Brazil. However, in certain cases, authorization can be exempted by regulation, especially in terms of production volume and the use of hydrogen as an input.
The law sets out the competences of the ANP to regulate, authorize and inspect the exploration and production of low-carbon hydrogen, within the scope of the sources used in the hydrogen production process, while respecting the powers of other regulators. The ANP will also be able to use so-called regulatory sandboxes (or experimental regulatory environments) to develop regulations and be authorized by law to adopt individual solutions before specific regulations for the sector are issued.
The National Electricity Authority (ANEEL) will be responsible for (i) providing contributions to the ANP to regulate the industry; and (ii) issuing utility declarations for distribution facilities in areas required for electricity transmission and for authorized agents with restricted interests, which are not used for connection to the national transmission or distribution systems, provided that they are dedicated to the exclusive supply of low-carbon hydrogen production projects.
The original text approved by Congress established the PHBC to provide tax credits to buyers and producers of low-carbon hydrogen, which would amount to 18.3 billion reais by 2032. The original text provided that the credits granted would be linked to the social contribution of net profits (CSLL).
However, when the bill was discussed in Congress, the clause that stipulated that the tax credit be linked to the CSLL was deleted. Therefore, the bill was passed with partial rejection of clauses 30 to 35, all of which refer to the PHBC, on the grounds of violating budget and fiscal rules.
Under the Constitution, the House and Senate have 30 days to decide together whether to uphold the veto. That deadline is September 1, 2024.
- Proposed Bill 3027/2024 — Adjustments to PHBC
To fill the gap left by the presidential veto, Congress and the federal government reached an agreement to introduce a new bill specifically targeting PHBC.
Bill 3027/2024 was introduced on August 2, 2024 by Congressman José Guimarães (PT/CE) and is currently being debated in the Chamber of Deputies.
According to the wording of Law 3027/2024, a total of BRL 18.3 billion in tax credits can 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
Law 3027/2024 provides that the executive branch will be responsible for determining the amount of tax credits granted to projects, taking into account the fiscal objectives and programmatic targets for each calendar year. The law also provides that, under the terms of the regulations, a competitive process will be followed before the credits are granted, and only projects that previously qualified will be able to participate.
Law 3027/2024 also reinstates the requirements for low-carbon hydrogen projects to receive PHBC tax credits, as previously provided for in Law 2308/2023:
- Promote regional development
- Contributing to climate change mitigation and adaptation measures
- Promote technology development and dissemination
- Contributing to the diversification of Brazilian industrial parks
On August 12, 2024, the House of Representatives approved Bill 3027/2024 under emergency procedures. The bill will be sent to the Senate and, if approved, to the President for final approval.
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Trench Rossi Watanabe has signed a strategic cooperation agreement for foreign legal consulting with Baker & McKenzie.
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