The latest state and federal legislation could potentially net Tesla billions.
Elon Musk is sitting on a metaphorical goldmine, and this time he doesn't even have to lift a finger to gain access to even more billions to add to the $270.7 billion he already has. Tesla is exceptionally fortunate, as it makes a great deal of profit from selling electric car credits. These credits will become more valuable now that the state of California has passed the Clean Cars II Act.
California will ban the sale of ICE cars from 2035, but automakers must hit several other targets as we slowly march toward the cut-off date. By 2026, 35% of new vehicles would need to be 100% tailpipe emissions-free, increasing to 51% in 2028. By 2030, you're looking at 68% and then 100% by 2035.
To fully understand the whole story, we need to go back to 2019 when President Trump was in charge. Former President Trump's administration and California were in constant conflict over mileage and emissions regulations. The Trump administration wanted federal standards, while California argued for state standards.
After months of meetings, California went ahead and adopted a set of regulations, and several other states also adopted these regulations.
It's a complex topic, so we'll give you the abridged version. Under California's regulations, a percentage of all cars sold must be BEV, PHEV, or hydrogen-electric. If not, automakers get fined. If they surpass this goal, they get additional credits. The California Air Resources Board calculates the credits for vehicles sold, and you can see how many credits are gained in the table below. The Tesla Model 3 Long Range doesn't score the highest credits, but the sheer volume Tesla manages to sell puts them in the lead. Every other manufacturer on the list below also builds ICE vehicles.
The legislation also allows automakers to buy and sell these credits, which puts Tesla in a highly enviable position. Tesla only sells EVs, unlike 99% of automotive manufacturers. According to Automotive News, Tesla logged a stockpile of 752,445 credits at the end of 2020. In the first six months of 2022, it was already sitting on two million credits. To put that in perspective, Toyota had 187,045 credits by the end of 2020. That was the second-largest balance logged that year. No reports are available for 2021.
We do have access to Tesla's financial statements, which shows the company made $2.1 billion from credit sales in 2021 and the first quarter of 2022.
There is no standard price for a credit, but using Tesla's sales as a basis, one credit works out to $3,500.
No other state has adopted California's new harsher regulations, but it is the biggest car market in the USA. If a manufacturer doesn't meet the requirements, it can expect a $20,000 fine per vehicle sold. With the average new car price in the US now set at $46,259, that's the profit margin completely wiped out and then some.
In addition to the Clean Cars II Act, manufacturers face challenges on a federal level thanks to the Inflation Reduction Act. The tax credit system has been extended to 2032, but only for cars built in North America.
As a result, Kia and Hyundai are in an awkward position. Without the $7,500 tax credit, consumers will likely gravitate towards other products that qualify for the credit. The list of cars that qualify is extremely short, which is likely why manufacturers are scrambling to erect US plants before California, and federal regulations start doing severe damage in 2026.
Automotive News spoke to several experts. In the short term, according to Anna Wong, a ZEV (Zero Emissions Vehicle) programs specialist with the California Air Resources Board, manufacturers should be okay. Most have earned enough credits to last until 2025.
"Because of the number of vehicles being launched, the low inventories for everything, and growing consumer interest in them, EV sales will continue to grow despite the changed availability for the tax credits," said Stephanie Brinley, S&P Global's auto industry analyst for North America.
Still, the legislation will inevitably create a vast demand for credits if factories aren't erected quickly enough, making Tesla even more valuable than it already is.