New law establishes Low-Carbon Hydrogen Development Program in Brazil

Published on September 30, 2024, Law No. 14,990/2024 (PHBC Law) has established Brazil’s Low-Carbon Hydrogen Development Program (PHBC). The program will allow for tax credits to be granted on the sale of low-carbon hydrogen between 2028 and 2032, with the funds to be distributed via a competitive process that has yet to be regulated.

The creation of the PHBC was actually provided for in the final draft of a bill for another recently enacted law (Bill No. 2,308/2023, which became Law No. 14,948/2024). However, as reported at the time, errors and inconsistencies were identified in the consolidated version of the bill and in certain amendments from the House of Representatives before it was officially signed into law. Among these issues was the exclusion of a provision guaranteeing PHBC tax credits on corporate income tax (specifically, the Social Contribution Tax on Net Profits – CSLL).

Given the lack of a congressional procedure that would allow for correcting such errors during the legislative process, Brazil’s Executive Branch and Congress agreed that the provisions related to the PHBC (Sections 30 to 35) to be vetoed in Law No. 14,948/2024. They would then be reintroduced with the necessary corrections in place via a separate bill, which has now been enacted as the PHBC Law.

In addition to formally establishing the PHBC, Law No. 14,990/2024 amends Law No. 14,948/2024 to give the Ministry of Mines and Energy (MME) powers to create a work plan to implement and monitor instruments concerning the Brazilian Low-Carbon Hydrogen Policy. The MME has 90 days from the date Law No. 14,990/2024 was issued to develop this plan.

The main aspects of the PHBC are outlined below:

PHBC goals

Section 2 of the PHBC Law lists the program’s goals, which include:

• Developing low-carbon hydrogen and renewable hydrogen;
• Supporting energy transition initiatives;
• Establishing specific goals to develop the domestic low-carbon hydrogen market;
• Providing incentives for decarbonization using low-carbon hydrogen in hard-to-decarbonize industrial sectors such as fertilizers, steel, cement, chemical, and petrochemical; and
• Promoting the use of low-carbon hydrogen in heavy-duty transportation.

Tax credits

The PHBC allows for tax credits to be granted between January 1, 2028, and December 31, 2032. It also establishes a cap on credit amounts offered for each year, as follows:

2028: BRL 1.7 billion

2029: BRL 2.9 billion

2030: BRL 4.2 billion

2031: BRL 4.5 billion

2032: BRL 5 billion

Unused amounts in a given year can be carried over and used in subsequent years. The maximum five-year period for granting tax credits is aligned with rules established by Brazil’s Budget Guidelines Laws (Section 142, I of Law No. 14,791/2023, as well as Section 136, I of the bill for the 2025 Budget Guidelines Law).

Tax credits stemming from the program will be granted as CSLL credits, and must be recognized in the beneficiary’s operating results. They can either be offset against their own outstanding or overdue tax debts linked to Brazilian IRS-administered federal taxes, or reimbursed in cash within 12 months of the date of the request.

The benefit may be granted either to companies or a consortium of companies (whether producers or buyers) as a result of selling low-carbon hydrogen, as detailed below. The amounts will correspond to up to 100% of the difference between the low-carbon hydrogen’s estimated price and the estimated price of the products it substitutes, as per forthcoming regulations. The percentage granted may be inversely proportional to the greenhouse gas (GHG) emissions of the produced hydrogen.

According to the law, the winners of the competitive process for distributing the credits will be entitled to fully utilize them within the deadlines and conditions established in law and regulations. Furthermore, the amounts of the tax credits must be accounted for in Brazil’s Annual Budget Laws (LOAs).

Benefit granting and eligibility criteria

The PHBC Law establishes that this tax benefit will be granted via a competitive process, which sets minimum eligibility criteria for projects to compete for the benefit. To be eligible, projects must meet two minimum criteria set forth in the law, without prejudice to others established in regulations or defined by the Brazilian government:

• Beneficiaries must be either producers who have been beneficiaries of the Special Incentive Regime for Low Carbon Hydrogen Production (Rehidro), or purchasers who acquire low-carbon hydrogen produced by a company or a consortium of companies benefiting from the Rehidro regime.
• The project must meet at least one of the following four requirements: contribute to regional development; contribute to climate change mitigation and adaptation measures; foster technological development and diffusion; or contribute to the diversification of the Brazilian industrial sector.

As per the terms of the PHBC Law, there is a 90-day deadline for concluding the qualification stage of the competitive process.

The competitive process

After the qualification/eligibility stage, companies interested in attaining the tax credit must participate in a competitive process. The specifics of this procedure still need to be defined in regulations. However, the PHBC Law already sets a minimum selection criterion – i.e., the lowest credit value per unit of measure of the product. Additionally, the law stipulates that the regulations may include other criteria, explicitly indicating two without prejudice to the determination of others:

• Projects that propose the lowest greenhouse gas (GHG) emission intensity for the hydrogen produced or consumed will be prioritized.
• Projects with the greatest potential for enhancing the national value chain will be prioritized.

Although there are no further details on the above criteria, it has been suggested that the PHBC’s intention is to encourage more sustainable pathways (i.e., those with lower GHG emissions in the production cycle), as well as projects that effectively structure the low-carbon hydrogen chain, and which can be scaled up and can lead to the creation of local productive chains.

In addition to the competition criteria, the PHBC Law stipulates that the regulations may provide for decreasing the amounts of tax credits granted over time. They may also require collateral to be put up as a guarantee for implementing hydrogen production or consumption projects.

Additional provisions

As per the PHBC Law, failure to implement an eligible project or implementing it in violation of the established criteria or regulatory requirements will see the beneficiary subject to a fine worth up to 20% of the tax credit value. Moreover, the beneficiary will be required to repay any improperly reimbursed or offset credits.

While the program is in effect, the PHBC Law stipulates that the Brazilian government will produce an annual report evaluating the outcomes of the National Low-Carbon Hydrogen Policy, the PHBC, the Brazilian Hydrogen Certification System (SBCH2), and Rehidro.

The report will also encompass a comprehensive list of the projects that applied for qualification, projects that were successfully qualified, and the results of monitoring and enforcement actions pertaining to the PHBC and the National Low-Carbon Hydrogen Policy. This includes any administrative and monetary sanctions that may have been imposed.

Pending regulatory issues

As outlined, the PHBC Law has established the foundations and parameters for granting the tax benefit. However, several points remain open or are still to be defined via regulations.

For instance, the law does not specify whether the credits will be secured in a single auction or multiple auctions. It also does not clarify whether an auction can secure credits for subsequent years or if annual auctions will be necessary.

Another unaddressed issue concerns how the benefit amounts will be divided among the winners of the competitive process – in other words, whether the benefit would be granted in an “all or nothing” manner or if there would be a fractional distribution of the total requested benefit. The latter scenario could render certain projects unfeasible, as they may require the full benefit amount for their economic model to work.

With the law now enacted, the Brazilian government is expected to organize a consultation process for the public to submit contributions on the regulation of the competitive process, as well as the regulation of Rehidro (provided for in Law No. 14,948/2024).

For more information, please contact Mattos Filho’s Tax and Infrastructure & Energy practices.