For years, little has been said about secret hiding places in plain sight: Tesla doesn’t make a lot of money selling cars. Instead, the company has cleverly capitalized on dominance of a complex market to sell global emissions credits. Examined in detail above, Tesla’s credit sales started small, averaging $ 3.4 million per year through 2011, and increased to $ 1.049 billion during the last four quarters ended June 30, 2020.
In summary, Tesla accumulates marketable credits from four main sources. The first category is the zero emission vehicle (ZEV) programs administered by the states, especially California. It also benefits from two US federal regulations, the Greenhouse Gas Emissions (GHG) Regulations imposed by the Environmental Protection Agency and the Corporate Average Fuel Savings (CAFE) Rules established by the National Administration of Highway Traffic Safety.
CAFE was born during the 1978 oil crisis and sets annual average miles per gallon standards that a manufacturer must meet for its entire fleet. Greenhouse gases stemmed from a 2007 Supreme Court decision that designated CO2 as a pollutant and therefore gave the EPA authority to regulate vehicles. GHG sets a limit on the amount of CO2 per vehicle that a manufacturer’s fleet can emit before triggering penalties. That same year, they also began giving ZEV-like credits to manufacturers that exceeded benchmarks.
Under both programs, Tesla earns maximum credits for each car it produces, since its vehicles do not consume gasoline or emit CO2. In fact, the credits you receive increase smoothly with production. Their customers’ need for credit increases as they build more substandard trucks and SUVs. Since Tesla loans and customer deficits go hand in hand, Tesla trades its CAFE and GHG credits into long-term contracts that produce more consistent, though less in the past, revenue than ZEV’s erratic sales flow.
Under President Obama, the CAFE and GHG rules became much stricter, requiring annual increases of 5% in fuel economy and a similar decrease in grams of CO2. But the Trump administration lowered the requirements to annual improvements of just 1.5%. If it’s still in effect, that downward shift means that most deficit automakers won’t need to increase their credit purchases in the future and can buy less.
“This is totally different from California, which is like a different country,” says Ben Leard, an environmental economist and assistant professor at the University of Tennessee. As a result, it predicts that the price of credits, and possibly volumes sold, will decline in 2021 and the next few years.
If current rules hold, Tesla is likely to see its CAFE and GHG revenues fall in the future. The decline should be gradual, in contrast to the ZEV, which should experience a peak followed by a sharp decline after a couple of years.
But a new administration could change that script. In his “Plan for Climate Change and Environmental Justice,” Biden is proud to increase CAFE’s mileage requirements during the Obama administration, implying that he would push to revive or even toughen those standards as president. To do so, it would need to buy the auto companies that initially agreed to Obama’s rules before convincing Trump to repeal them. If you can’t get the automakers to agree, you probably have to go to the law. And tightening the GHG rules requires amending the Clean Air Act. So if Biden wins the presidency in a blue sweep, wins the majority of the House and wins the Senate, automakers will likely be forced to buy many more Tesla credits to avoid big penalties. However, that is only a short-term benefit. The stricter regime will also force manufacturers to accelerate their transition to electric cars.
There, the biggest buyer of Tesla credits has been FCA, maker of Jeep, Fiat, Maserati and Alfa Romeo. But FCA plans to launch several hybrids, plug-ins and electric vehicles from 2020 to 2022, including new versions of the Jeep Renegade SUV, as well as the new all-electric version of the Fiat 500. FCA leaders have publicly stated that they expect the automaker it will meet the new rules on its own by 2022, which means it no longer needs Tesla. In late 2019, FCA agreed to merge with the much greener Peugeot, a deal that is expected to close next year. That union could bring the FCA online even sooner.
But even an environmentalist in the White House will only buy Tesla for a while, rather than preserving its current profit stream. Revenues from CAFE and GHG will eventually succumb to the blow of increased competition.
