Tax Law Highlights | Energy Transition in Brazil

Updates in evidence

1. Energy Transition: concept, objective, investments and how to achieve it.
2. Green Hydrogen: what it is, what it is used for, how it is obtained, other types of hydrogen, the Brazilian landscape, tax aspects and the regulatory framework.
3. Tax Reform: Constitutional Amendment No. 132 and Bill of Law No. 68/2024.

Introduction

The Energy Transition is a paradigm shift that involves not only energy generation, but also energy consumption and reuse. The key idea is to switch from polluting energy matrices, such as fossil fuels based on coal or oil, to renewable energy sources, i.e. energy generated by hydroelectric, wind, solar and biomass power plants.

The main objective of this initiative is the search for a sustainable ecosystem in which there would be no - or almost zero - greenhouse gas (GHG) emissions, reducing, for example, carbon (CO2) emissions into the atmosphere.

There are countless ways to achieve this goal, but four ways stand out:

1. The use of renewable energies, a topic that stands out in Brazil, given that 44.8% of the energy matrix and 84.8% of the electricity matrix come from renewable energy sources.
2. Decarbonization, which is the process of reducing emissions or removing CO2 from the atmosphere;
3. The digitalization of energy distribution, enabling a better balance between supply and demand; and
4. Regulatory initiatives aimed at creating tax incentive programs and regulating the carbon market.

In addition, because it is a 100% clean energy source, meaning it is totally free of GHG generation in all its production phases, Green Hydrogen (H2V) is considered the energy source of the future and differs from other types of hydrogen, such as gray and black, because it is produced through the electrolysis of water, a reaction generated by clean and renewable energy.

Tax landscape

Despite the significance of the issue and the GHG emission reduction targets agreed by Brazil, few effective government initiatives have been implemented in recent years. Particularly noteworthy in Brazil is the lack of regulation of the carbon market and the failure to combat deforestation (which accounts for 49% of Brazil's carbon emissions) and the still incipient Brazilian investment in the Energy Transition, which in 2023 amounted to US$ 34.8 billion, while countries like China and the USA invested US$ 676 billion and US$ 303 billion, respectively.

Another important aspect is the fact that the types of hydrogen do not have a specific tax classification, i.e. they are generically classified as “hydrogen”. This categorization does not encourage the production of H2V, since it will be taxed in the same way as Black Hydrogen, which is generated by burning coal, emitting a high level of CO2 into the atmosphere.

In this context, until the advent of the Legal Framework for low-carbon hydrogen at the federal level, there was no specific tax benefit or incentive in Brazil to benefit the production of H2V and other types of low-carbon hydrogen.

Repercussions and changes

Given the importance of this issue, a number of legislative initiatives are being adopted to boost both the Energy Transition and the Green Hydrogen Market in Brazil. Law 14.948/2024¹, which established the legal framework for low-carbon hydrogen, the National Low-Carbon Hydrogen Policy, incentives for the low-carbon hydrogen industry and the Special Incentive Regime for Low-Carbon Hydrogen Production (Rehidro), and Provisional Measure 1. 205/23, converted into Law 14.902/2024, which creates the Green Mobility and Innovation Program (Mover Program).

Among the Bills still pending in Congress are (i) Bill 576/2021 regulating energy potential in offshore areas (formerly the offshore wind bill); (ii) Bill 182/2024 regulating the carbon market; and (iii) Bill 528/2020, which deals with the “fuel of the future”.

It is also worth noting that the Brazilian Tax Reform seeks to encourage the Energy Transition in Brazil, especially with environmental protection becoming a priority of the National Tax System. Constitutional Amendment No. 132/2023, for example, established, among other things, the need for a favored tax regime of Tax on Goods and Services (IBS) and Contribution on Goods and Services (CBS) for biofuels and low-carbon hydrogen, lower than the tax on fossil fuels and the incidence of Excise Tax (IS) on the production, extraction, sale or import of goods and services harmful to health or the environment.

Complementary Bill 68/2024, which aims to regulate the general IBS and CBS rules, guarantees, for example, the suspension of CBS and IBS payments on imports or purchases on the domestic market of raw materials, intermediate products and packaging materials for supply to companies authorized to operate in Export Processing Zones.

What conclusions can we draw?

Brazil is making significant strides in the Energy Transition, especially in approving regulatory laws and creating tax incentives that boost the clean and renewable energy market.

There are aspects that remain to be developed, such as increased investment in the Energy Transition, the establishment of a Mercosur Common Nomenclature for low-carbon hydrogen types and the regulation of the carbon market, in order to encourage the achievement of the GHG reduction targets agreed by Brazil.

The Tax team is available to discuss the topic and the main aspects of the regulation that could impact our clients' business.

Watch the class about the subject.

¹ At the time the video was recorded, the aforementioned normative text was awaiting presidential sanction, which took place on August 2, 2024.