Brazil has taken a significant step towards fostering a low-carbon economy by establishing a legal framework for low-carbon hydrogen production.
President Luiz Inacio Lula da Silva recently signed into law a framework aimed at attracting investments in low-carbon hydrogen. Effective January 1, this legislation seeks to position Brazil as a competitive player in the global hydrogen market. However, the decision to veto specific tax credits raises questions about the framework’s ability to fully achieve its ambitious goals.
The legislation was initially designed to include tax incentives to further stimulate investment in hydrogen production. By vetoing these tax credits, Lula, advised by the Finance Ministry and the chief of staff, may have inadvertently undermined the framework’s effectiveness. Tax credits are a proven mechanism to attract foreign and domestic investments, and their absence could deter potential investors looking for financial incentives to offset initial costs.
When compared to international standards, Brazil’s framework appears less competitive without the tax credits. Countries like Germany and Japan, which are leaders in hydrogen technology, offer substantial financial incentives to attract and retain investments. Brazil’s decision to forgo similar incentives could place it at a disadvantage, slowing down the progress needed to meet global low-carbon targets.
In the short term, the absence of tax credits might result in slower investment inflows. Companies seeking to invest in low-carbon hydrogen might prioritize countries with more favorable financial conditions, thereby affecting Brazil’s immediate competitiveness.
Long-term, Brazil’s legislation might still attract investment due to its natural resources and strategic location. However, the lack of initial financial incentives could slow the pace of development and delay the country’s emergence as a key player in the global hydrogen market.
The government’s rationale behind vetoing the tax credits, as communicated to Senate President Rodrigo Pacheco, highlights a cautious approach to fiscal policy. While maintaining fiscal discipline is important, balancing it with the need to foster a nascent industry is crucial for sustainable economic growth.
To align with global best practices and enhance the framework’s effectiveness, Brazil could consider reintroducing targeted financial incentives. These could include performance-based tax credits, grants for research and development, and subsidies for infrastructure development, which would make the market more attractive to investors.
