Bill establishing legal framework for low-carbon hydrogen signed into law in Brazil

On August 2, 2024, a bill establishing the regulatory framework for low-carbon hydrogen production and incentive mechanisms for the low-carbon hydrogen sector was signed into law as Law No. 14,948/2024. The basic text had been approved in the Senate on June 19, 2024, and in the House of Representatives on July 11, 2024.

Debates in the Senate led to significant changes to the original draft prepared by the House of Representatives. These included changes to the definition of hydrogen categories, the structure of a tax benefit regime, and the creation of a tax credit program. Proposed changes to the regimes for Export Processing Zones (ZPEs), self-produced electric power, and the environmental licensing of hydrogen projects were also discussed but not approved.

The provisions defining that the tax credits granted under the bill would be classified as Social Contribution Tax on Net Income (CSLL) credits was mistakenly removed while the bill’s text was being consolidated in the House. Therefore, Brazil’s Congress reached an agreement with the government for the latter to partially veto the bill and resubmit the tax credit incentive program (Low-Carbon Hydrogen Development Program – PHBC) as a separate bill of law (Bill No. 3,027/2024).

Learn more about key aspects of the new law below:

Hydrogen classification

The new law establishes three distinct classifications for hydrogen while also creating definitions for hydrogen derivatives and carriers:

• Low-carbon hydrogen: hydrogen fuel or an industrial input with GHG emissions of up to 7 kg of COe for each kg of H2, based on an analysis of its life cycle (the bill originally provided for a limit of 4 kg of CO2e for each kg of H2, but this was raised to 7 kg);
• Renewable hydrogen: low-carbon hydrogen (as defined above) extracted as natural hydrogen or obtained from renewable sources (such as biofuels) or via renewable energy-powered electrolysis (such as solar, wind, hydraulic, geothermal, or biomass power);
• Green hydrogen: hydrogen produced by water electrolysis fed by renewable energy sources (such as solar, wind, hydraulic, geothermal, biomass or others that may be recognized as renewable);
• Hydrogen derivatives: products of industrial origin that use hydrogen (either collected or obtained in the forms provided for in the law) as an input in the production process;
• Hydrogen carriers: substances or materials that carry hydrogen for storage, packaging, transport or transfer purposes and release it on-site in its original form.

National Low-Carbon Hydrogen Policy

The new law also establishes the National Policy for Low Carbon Hydrogen, which encompasses all the benefits and incentive programs mentioned above. The policy’s technical and economic framework will be defined by the National Energy Policy Council (CNPE) based on proposals from the Ministry of Mines and Energy (MME). The guidelines for implementing the policy will be established by the National Hydrogen Program Management Committee (Coges-PNH2), which will include representatives from the scientific community and the productive sector, as well as Brazil’s states and Federal District.

The ANP as the competent authority

The production of hydrogen, its derivatives and carriers must be carried out by a company or consortium constituted under Brazilian law whose headquarters and management are also based in Brazil.

The Brazilian Agency of Petroleum, Natural Gas and Biofuels (ANP) will be the public authority with the jurisdiction to regulate and authorize:

• Low-carbon hydrogen production;
• Natural hydrogen exploration/extraction; and
• Activities related to loading, processing, treating, importing, exporting, storing, stowing, packaging, transporting, transferring, sale and resale of hydrogen, its derivatives and carriers.

In practice, this means that ANP will be the competent authority to regulate the production or extraction of hydrogen, as well as the movement and sale of its derivatives and carriers. The agency will, therefore, have the power to regulate infrastructure associated with the transportation of inputs and derivatives like ammonia, though it will not have the power to regulate the production or quality of such inputs.

Companies authorized to produce low-carbon hydrogen will be prioritized in regard to authorization applications for carrying out the activities indicated in the third point above.

The law also grants the ANP the power to declare eminent domain (utilidade pública) over areas required for constructing necessary infrastructure for hydrogen production.

Brazilian Hydrogen Certification System

The new law also creates the Brazilian Hydrogen Certification System (SBCH2), which will be in charge of the accreditation for certifying companies (among other responsibilities). The system will issue a certificate for the hydrogen, indicating the level of GHG associated with its life cycle. The certification criteria are to be established via future regulations.

The competent regulatory authority (yet to be defined) will be responsible for:

• Establishing hydrogen certification guidelines;
• Supervising the movement of sold hydrogen;
• Supervising certifying companies;
• Defining and setting administrative and monetary sanctions; and
• Providing mechanisms for aligning hydrogen certification in Brazil with international standards.

Rehidro Tax Regime

One of the main incentives for the hydrogen sector established in the law is the Special Incentive Regime for Low-Carbon Hydrogen Production (Rehidro).

The logic behind Rehidro is to ensure that the benefits of the Special Incentive Regime for Infrastructure Projects (REIDI) are applied to hydrogen projects. Companies accredited with Rehidro may take advantage of suspended PIS/COFINS and PIS/COFINS-Import taxes on local acquisitions and imports of relevant machinery, new devices, instruments and equipment, as well as construction materials and services for using or incorporating components of infrastructure works associated with hydrogen projects. The incentives will be valid for five years, starting on January 1, 2025.

The Brazilian government will regulate the procedure for companies to qualify for Rehidro. The requirements must include:

• Being qualified to produce low-carbon hydrogen;
• A minimum percentage of local content used in the production process (requirement waived if there are no domestic equivalents or in the event of insufficient local supply); and
• Minimum investments in research, development, and innovation.

Companies involved in packaging, storing, transporting, distributing or selling low-carbon hydrogen or companies that either generate renewable electricity or produce biofuels (ethanol, biogas or biomethane) for the production of low-carbon hydrogen may apply for Rehidro on a co-qualification basis. Companies that opt for the Simples Nacional tax regime will not be able to qualify for Rehidro benefits.

Rehidro beneficiaries may also issue incentivized debentures under Article 2 of Law No. 12,431 to raise funds for implementing or expanding projects to produce, package, store, transport, distribute or sell low-carbon hydrogen. Such debentures may also be issued for renewable electricity projects or the production of biofuels used in the low-carbon hydrogen chain.

The law also permits companies acting in Export Processing Zones (ZPEs) to enjoy the Rehidro benefits.

According to statements from members of the House of Representatives during the final voting round on the bill, the Ministry of Mines and Energy (MME) has agreed to present a proposal to regulate the Rehidro qualification process within 90 days of the bill being signed into law. This information has not, however, been confirmed in official documents.

Low-Carbon Hydrogen Program (PHBC) – vetoed

The text originally sent for presidential assent established the PHBC, a tax credit program for sales of low-carbon hydrogen and its derivatives produced on Brazilian territory. However, when the bill was returned to the House, an article determining that such tax credits would be linked to CSLL credits was mistakenly removed. As a result (and according to statements from Representative Arnaldo Jardim), Congress and the government agreed for the latter to veto the parts of the bill concerning the PHBC and subsequently regulate the program via a separate law. On the same day that Law No. 14,948/2024 was approved, Representative José Guimarães introduced Bill No. 3,027/2024 to Congress, which would establish the PHBC in line with the text already debated in Congress.

According to Bill No. 3,027/2024, projects must meet at least one of the following requirements to be eligible for the tax credit:

• Contribute to regional development;
• Contribute to climate change mitigation and adaptation measures;
• Incentivize the development and spread of technology; or
• Contribute to diversifying Brazilian industry.

If the bill is approved, the PHBC will grant up to BRL 18.3 billion in tax credits for sales and acquisition of low-carbon hydrogen in Brazil between 2028 and 2032. The PHBC bill establishes annual limits on the amount of credits granted, which may be used either in the same year they are granted or in the following years.

The concession of credits will be preceded by a competitive process that is yet to be regulated. Companies may qualify for PHBC benefits if they participate in the competitive process and are beneficiaries of Rehidro (in the case of producers) or if they acquire low-carbon hydrogen produced by a company or consortium that is a Rehidro beneficiary. One of the criteria for analyzing proposals in the competitive process will be the lowest amount of credit per unit of product (hydrogen or derivatives). The bill establishes that projects providing for lower-intensity GHG emissions in relation to the associated hydrogen, and projects with greater potential for densification within the Brazilian value chain will be prioritized in regard to obtaining credits.

As per the submitted version of Bill No. 3,027/2024, granted credits may be offset against debts related to taxes administered by Brazil’s Federal Revenue Service (Receita Federal) or reimbursed within 60 days if such debts do not exist or are insufficient.

After being converted into law, the PHBC will still require further regulation to be implemented.

For more information, please contact Mattos Filho’s Energy Transition and Infrastructure & Energy practice areas.