Brazil's tax credits for hydrogen should provide an impetus for developers to get projects off the ground quickly, with credits up for grabs as early as 2028 and then due to expire by the end of 2032.
Brazil's government last year earmarked 18.3bn Brazilian reais ($3.1bn) for the tax credits programme (see table). Finance ministry officials said this week that the current administration cannot make decisions about Treasury matters beyond the end of 2032, meaning the plans will for now remain limited to five years.
The credits will be allocated through a competitive procedure to selected companies that produce or consume low-carbon hydrogen — which Brazil leniently defines as having emissions of less than 7kg CO2 equivalent per kg of hydrogen. The scheme is specifically targeting large-scale initiatives, as separate support mechanisms are available to smaller research or demonstration projects.
With the 2028-32 timeframe, developers of these large projects will feel an increased sense of urgency, especially compared with other countries. In Australia, another large economy with high hopes for hydrogen exports, reaching a final investment decision (FID) by June 2030 is enough for projects to secure tax credits of A$2/kg ($1.25/kg) up until 2040, meaning plants coming on line in the mid-2030s could still get support for five years or so.
While experience from countries like Australia may have given Brazil some inspirations for its own scheme, Brasilia has had to adapt the incentives to its own budgetary and political reality.
Brazil's comparatively short timeframe for the tax credits means projects at more advanced stages could be the most likely beneficiaries. But even these still have to work through key challenges such as securing buyers, and with no major plant yet reaching FID there are questions about how much production or consumption will stand ready for the tax credits by 2028.
Unused amounts can be transferred to the following years up until 2032, meaning the annual budget will not be forfeited if not enough low-carbon hydrogen production is online by 2028.
Competition for the limited annual budgets is likely to increase over the five year periods as more projects start or near completion. The tax credits will probably be allocated through different auction rounds, the finance ministry undersecretary for monitoring and regulation Gustavo Henrique Ferreira said this week.
The criteria for each auction would take into the consideration the needs of the industry at a specific moment and will "select specific slices of the market" to benefit from support, such as growing production or promoting demand, Ferreira said.
Decarbonisation of hard-to-abate sectors in Brazil, such as fertiliser and cement production, steelmaking and heavy transport, are to be prioritised, but export-oriented projects could help with scaling up the sector, Ferreira said.
Beyond the tax credit programme, low-carbon hydrogen projects in Brazil can benefit from incentives such as tax exemptions and more favourable financing terms. Projects will need to be certified as low-carbon under a yet-to-be established certification system to avail these benefits.
The government received more than 1,400 suggestions about how to structure incentive mechanisms in a 2024 consultation process, the finance ministry's head of energy and mining regulation Carlos Colombo said.
Suggestions for the tax credit scheme placed a strong focus on enabling growth of the national market and several respondents called for local content requirements for projects, Colombo said. The suggestions will be taken into account for the tax credits' final design, Colombo said.
While Brasilia has not specified when it aims to finalise the tax credit rules, first allocations by 2028 should provide a sense of urgency. Brazil aims to have a strong energy transition agenda by the time it hosts the UN climate summit Cop 30 in November.
Grid concerns
Government officials have said Brasilia is working with national energy research body EPE and grid operator ONS to assess future demand for grid capacity and transmissions, especially with regard to hydrogen projects.
The energy ministry has requested "at least 4GW" of expansion for grid capacity in the coming years, the ministry's planning and energy transition secretary Thiago Barral said.
Electricity entities have seen an increasing number of requests for grid connection for hydrogen production projects over the last year, Barral said. Connections at the special exporting zones, where several large-scale projects are planned, represent a particular challenge, he said.
