Is the Regulatory Framework for Green Hydrogen Adequate?

Felipe Diniz, partner at Mirow & Co.

(Originally published in Folha de São Paulo on 03/02/2024)

The bill approved in the Chamber of Deputies to regulate green hydrogen (GH2), significantly pared down before heading to the Senate, only partially meets the needs of an emerging sector in which Brazil could be a market leader. The approved legislation, on the eve of COP28, establishes the rules of the game, such as taxonomy and governance. However, it lacks a robust public policy that outlines the country’s strategy for the sector.

The bill includes the Low Carbon Hydrogen Development Program (PHBC), including auctions similar to those in Germany, though with limited resources. It also ensures the suspension of the PIS/Cofins tax for capex [capital expenditure], but excludes a significant portion of the expected incentives.

While the topics covered in the bill are crucial for legal certainty, they are insufficient to meet the demands for sector growth. The regulatory framework was expected, following the example of benchmark countries, to provide a set of policies promoting the competitiveness of GH2 over fossil fuels. As a result, Brazil could not only accelerate its decarbonization but also position itself as a global player and develop a domestic market for GH2, reducing dependence on exports.

Green hydrogen is still more expensive than fossil fuels and, without adequate incentives, will remain confined to niche markets, with few buyers willing to pay a premium for decarbonization. Additionally, without stimuli, Brazil will face significant loss of competitiveness in this market. A study by Mirow & Co. estimates that, with the withdrawal of incentives from the bill, Brazilian GH2 will be 30% more expensive than that of the USA, despite lower production costs.

Counterarguments to subsidies in the bill highlight three main concerns. Firstly, the economic viability of hydrogen in the country’s decarbonization matrix is questioned, which could consider alternatives such as biofuels. However, a strategy relying solely on biofuels may limit energy diversification and hinder the development of an industry with high potential.

Secondly, concern about the impact on public spending is evident, with the argument that GH2 subsidies could increase the burden on the Budget. However, many of the incentives sought consist of tax breaks, which do not represent a direct increase in Treasury spending. These can be partially offset by tax revenues generated by the construction of new plants, according to a study by the Brazilian Association of Green Hydrogen Industry (ABIHV).

Finally, there is the fear that they may increase the electricity bill due to reduced levies and wire costs. It is important to note that the increase in renewable generation should be phased in over several years and that the proposed incentives should be transitional and limited to specific installed capacity. Thus, pioneering projects would be encouraged, minimizing potential negative impacts.

The bill recently approved by the Chamber now goes to the Senate for discussion. Meanwhile, senators have drafted an alternative bill seeking to reintegrate several incentives excluded by the original bill. Regardless, Congress must carefully weigh the costs and benefits of this new technology, considering the long-term impacts for the country. Brazil has enormous potential to lead this market and play a prominent role in global climate discussions. However, no potential can withstand the lack of strategy.