The setting for the recent signing of Brazil’s landmark low-carbon hydrogen framework said much about the country’s long-term energy ambitions. Speaking from Brazil’s second-largest port, Pecem, President Luiz Inacio Lula da Silva boasted that “when I see people talking about green hydrogen, solar energy, wind energy and biomass, I wonder: what country in the world can compete with Brazil?”

Brazil no doubt has the potential to one day flood the world with low-carbon hydrogen exports. Global consulting firm BCG estimates that Latin America’s largest economy holds the capacity to capture 15% of global low-carbon hydrogen trade flows by 2030, ultimately creating a $180b tradable market by mid-century.  

“When I see people talking about green hydrogen, solar energy, wind energy and biomass, I wonder: what country in the world can compete with Brazil?” President Luiz Inacio Lula da Silva

Achieving anything close to those numbers would be a major achievement. In the short term, the hope is the new legal framework boosts production and attracts more investment in infrastructure for transportation and storage.  

“The new legislation is a significant step in regulating and promoting the low-carbon hydrogen industry,” said Marcos Ludwig, a partner at Brazilian law firm Veirano Advogados. “Although some sectors expected more aggressive incentives, there is general understanding that the outcome is mostly positive for establishing the legal framework that the private sector was waiting for and reducing legal uncertainty.”

Small steps

The announcement did not come completely out of the blue. In 2021, the government launched the National Hydrogen Programme (PNH2), laying down some strategic guidelines for low-carbon hydrogen. One of the key elements was to boost annual investment in research and development, as well as pilot projects, and set in motion the creation of low-carbon hydrogen hubs by 2035.

Before the low-carbon hydrogen framework was passed, however, Brazil had very little regulatory oversight. That has now changed as the law defines exactly what qualifies as low-carbon hydrogen. The bill sets the emission limit below or equal to 7kg of CO₂/kg of hydrogen produced. Green hydrogen is also defined as hydrogen produced by electrolysis of water from renewable energy sources.

“The National Petroleum, Natural Gas and Biofuels Agency (ANP) will be responsible for regulating and authorising all activities of the hydrogen industry,” added Ana Karina Souza, a partner at Brazilian law firm Machado Meyer. “Items to still be addressed in a future federal decree include the authority of other regulatory agencies in relation to authorisation of hydrogen production projects.”

Setting the wheels in motion

Under the new framework, the government also created the Special Incentive Regime for the Production of Low-Carbon Hydrogen (REHIDRO). These tax incentives follow on from a similar framework laid out previously in the Special Incentives Regime for Infrastructure Development (REIDI). This essentially provides tax reductions for infrastructure developments.

How exactly businesses will qualify for REHIDRO has yet to be addressed under the current framework but is expected to be included in future legislation. “The requirements for qualification are still to be established in regulation, including the minimum percentage use of local goods and services in the production process as well as minimum investments for survey, development and innovation,” said Souza. The licence regime for exploration and production of natural hydrogen is another area that will likely appear in future federal decrees.

15% – Potential market share

A new system of hydrogen accreditation was also included as part of the new framework. The Brazilian Hydrogen Certification System (SBCH2) will issue certifications, measuring and displaying the volume of greenhouse gas emissions associated with the lifecycle of each project’s hydrogen production.

“The regulatory authority (yet to be defined) shall establish the requirements for the accreditation of certifying companies,” explained Souza. “Each certificate issued will measure greenhouse gas emission intensity and ensure that there is no double counting.”

Refining the rules

However, not everything included in the initial draft version of the law was ultimately approved. The chapter that provided for BRL$18.3b ($3.35b) in tax credits to be issued by a new incentive scheme, the Low-Carbon Hydrogen Development Programme (PHBC), was removed after a mistake in the bill’s final wording.  

“President Lula da Silva vetoed the section of the bill approved by Brazil’s National Congress that introduced a programme contemplating additional incentives in the form of a concession of tax credits and economic subsidies for eligible activities,” explained Ludwig. “In a solution aligned between the government and Congress, a new bill of law was presented in Congress proposing a rectified version of the vetoed section.”

The new bill with the vetoed elements was approved by the Senate on 4 September. According to the text, tax credits will be granted from 2028 to 2032 as part of the REHIDRO programme. The bill will next be presented again to the president to be signed into law.

Unleashing the potential

The hope is that the new regulations play a big role in Brazil’s energy transition. According to research from the Brazilian Green Hydrogen Industry Association (ABIHV), once the regulations are in force and the first of 57 memorandums for understanding for green hydrogen projects are fully approved, almost BRL800b in revenues could be generated.

The trade association believes that, if Brazil could capture just a 4% global market share of green hydrogen by 2050, that could add BRL7t to GDP. Even in the short term, Brazil should expect to generate a fiscal surplus of BRL70b by 2030, due to the major uptick in construction activity.

Brazil has a major advantage over many global economies. The country already produces around 92% of its electricity from renewable energy sources. BCG expects local demand for green hydrogen to initially soak up 0.5–1.5mt by 2030.

Ammonia and methanol for long haul transport as well as green fertilisers are particularly expected to attract domestic investment. In 2022, Brazil imported around 85% of its fertiliser supply, making the country extremely vulnerable to price spikes.

As the world’s fourth-largest consumer of nitrogen fertilisers, unsurprisingly this adds massive cost. Russia is also a major supplier, responsible for as much as a quarter of the imports into the country, again adding to Brazil’s geopolitical vulnerability.

In November, the government approved the National Fertilizer Plan, aiming to reduce the country’s dependence on imports to 50% by mid-century. The hope is that the new low-carbon hydrogen framework can help play a big role in achieving that goal via more green ammonia production.

Notably, the $850m green hydrogen plant in Uberaba, Minas Gerais, could prove to be a landmark project when it eventually reaches startup in 2028. The initiative is expected to begin construction next year and generate 500,000t/yr of green ammonium nitrate when fully operational.  

Hard-to-abate emissions

As the world’s ninth-largest steel manufacturer, Brazil could also look to decarbonise its operations. Converting the country’s entire supply to green steel would require in excess of 2mt/yr of green hydrogen, as well as around 26GW of renewable energy supply, according to research from the Oxford Institute for Energy Studies.  

Supporting local demand will no doubt be key to kickstarting green hydrogen production, especially as initial projects are expected to have higher costs. For the fertiliser sector, Brazil competes with countries that can already produce low-cost, low-carbon hydrogen from cheap natural gas. Today, the levelised cost of ammonia from green hydrogen is estimated to be 2–5 times that of ammonia produced through grey hydrogen.

Shifting to green steel will also need policy support, while sensitivity to volatile pricing already affects the industry. Last year, imports of cheap Chinese steel forced one of the largest producers, Usiminas, to temporarily shut down one of their three blast furnaces. Another producer, Aperam, postponed their expansion investment schedules a year because of the price competition. Without further economic incentives, it is hard to see these hard-to-abate sectors voluntarily shifting to greener feedstocks any time soon.  

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Author: Marat Aslan