Currently reading: Inside the industry: How selling emissions credits helps Tesla grow
Tesla made a crucial 7% of its Q2 revenue selling emissions credits to other brands, not all of which are forthcoming
Jim Holder
News
2 mins read
10 August 2020

Hidden in what you might call the small print, were it not such a large number, of Tesla’s recent Q2 financial report were the latest figures highlighting its income from selling emissions credits to rival car makers: $428 million, or 7% of the company’s revenue.

The moral standpoint of these credits is hotly debated. They work in a variety of ways, such as car makers with emissions below the mandated target selling them to car makers above the target, or car makers with zero-emissions capability selling them to car makers without it, allowing them to then sell cars in various US states, including California.

These credits have played a crucial role in Tesla’s against-all-odds growth. Its net profit for the Covid-19-afflicted quarter running from March to June was $104m, and without the credits, it would not have recorded accounting profitability across the past 12 months, a milestone that unlocks a variety of potential benefits for the firm, not least increased standing in the all-important investor circles, where even the most conservative of commentators can now justify getting a bit giddy. An operating margin of 5% – okay in car industry terms – would be a perilous 1% without them.

The estimate is that Tesla will earn more than $1 billion from these credits in 2020 alone, and while senior executives concede that they are staring down the barrel of a decreasing income stream as rivals get their acts together and launch some BEVs of their own, the rate at which Tesla is earning has so far kept accelerating. It’s a lucrative if unpredictable income stream currently enjoying exponential growth: in 2018 Tesla earned $419m from them and in 2019 $593m.

Who is buying the credits, and what they are paying, is hidden mostly in opaque accounting. Of everyone, Fiat Chrysler Automobiles is the most open because of its ownership structure, so it is on record that FCA has a deal to buy $1.1bn of credits through to 2023. Court filings last year revealed that GM, which has its own EV capability with the Bolt, is also a customer.

However, one CEO, well known for being brilliantly connected and with recent experience of mainstream premium brands, recently told Autocar that “almost every car maker is buying credits in some form, but we don’t have to declare it.”

None of this is Tesla’s fault, of course. Indeed, a fair mind can only give credit where it is due. But when it’s cheaper to pay a competitor than build cars to meet regulations, you have to wonder if the system itself is fit for purpose.

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Comments
14

10 August 2020

This is a disgusting side effect. Tesla makes it possible for other manufacturers to produce obscene huge heavy gas guzzlers, instead of doing its bit toward climate change. The government should be buying and extinguishing the carbon credits. Trade in these should have to be revealed in quarterly reports. 

10 August 2020
fellwalker wrote:

This is a disgusting side effect. Tesla makes it possible for other manufacturers to produce obscene huge heavy gas guzzlers, instead of doing its bit toward climate change. The government should be buying and extinguishing the carbon credits. Trade in these should have to be revealed in quarterly reports. 

The way it works is this: if you produce cars over the average emissions limits you must pay fines directly to government.

If you want however you can buy credits from people producing lower emissions vehicles at a certain % of the fines that you would otherwise pay, the % is entirely a private matter between the businesses.

This way round rather than tax payer who may be poor and not car users paying subsidies to EV owners it is the drivers of high emissions vehicles.

FCA is basically paying TSLA to build a european factory to further crush them. There is therefore a double incentive to build EVs.

With regards TSLA profitability, the company grows by 45% a year on average, it could be a profitable $30 billion annual revenue company but I'd rather invest in a company with the intention of being a profitable $300 billion revenue company.

10 August 2020

Far better than the corrupt scheme BIK that's helping Hybrids stay afloat.

10 August 2020

an EV company can only post profits by leaching from legacy companies.. This should be banned, and the playing field should be leveled out, because its only the big companies that can afford to pay Tesla for them, meanwhile companies like Honda, Mitsubishi and Subaru are struggling and pulling out of Europe, Even GM cant afford it.    

10 August 2020

No, an EV company can boost it's profit by selling to credits to backward companies that couldn't predict what was happening in the motor industry

10 August 2020
xxxx wrote:

No, an EV company can boost it's profit by selling to credits to backward companies that couldn't predict what was happening in the motor industry

Oh a bit like VW boosted its profits by selling dodgy diesels to gullible customers, its cheating, plain and simple, EVs are not the answer, and never will be, and Tesla certainly are not saints.. 

10 August 2020
Citytiger wrote:

an EV company can only post profits by leaching from legacy companies.. This should be banned, and the playing field should be leveled out, because its only the big companies that can afford to pay Tesla for them, meanwhile companies like Honda, Mitsubishi and Subaru are struggling and pulling out of Europe, Even GM cant afford it.    

...Or they could build their own EVs. None of those companies are starting from such a disadvantaged position as Tesla, which has gone 16 years without profits, sells a fraction of the vehicles per year, has a seemingly mentally ill CEO, is based in a country which is currently under an anti-environmental government, builds most of its cars in one of the most expensive regions on the planet (and one with precious little previous manufacturing expertise), and has a multi-billion dollar financial market solely dedicated to seeing the company fail. So what's Honda's excuse? Or Mitsubishi, who actually have some expertise in plug-in tech?

If they're not willing to invest, let them pay. One way or another, the world's swapping money from combustion vehicles to electric vehicles.

10 August 2020
Vertigo wrote:

Citytiger wrote:

an EV company can only post profits by leaching from legacy companies.. This should be banned, and the playing field should be leveled out, because its only the big companies that can afford to pay Tesla for them, meanwhile companies like Honda, Mitsubishi and Subaru are struggling and pulling out of Europe, Even GM cant afford it.    

...Or they could build their own EVs.

I pray they do build there own EV's then Tesla will have no one to sell his emissions credits to, and the profits will once again be non existent, that day cant come soon enough. 

10 August 2020

Surely if this is allowed to continue, then there will be a big market for small, low range, ultra cheap EVs (like the Renault Twizzy) sold simply to gain emission credits? By selling such cars, manufactures would be able to continue selling big thirsty SUVs without penalty. The obvious downside is that small cheap EVs would inevitably be bought as second or third cars contributing to further congestion as well as further environmental damage caused by building more vehicles we don't need.  

10 August 2020
LP in Brighton wrote:

Surely if this is allowed to continue, then there will be a big market for small, low range, ultra cheap EVs (like the Renault Twizzy) sold simply to gain emission credits? By selling such cars, manufactures would be able to continue selling big thirsty SUVs without penalty. The obvious downside is that small cheap EVs would inevitably be bought as second or third cars contributing to further congestion as well as further environmental damage caused by building more vehicles we don't need.  

Compliance or low-end EVs have been around for decades, the problem is that they're not particularly desirable, so don't sell well. The Renault Twizy has sold about 30k *to date* in 8 years on sale; Tesla sells that many in a month and at a much higher price. So as the number of EV sales required for compliance increases, the more desirable they'll need to be. We're already way past the point where a Twizy or G-wiz is going to help any company.

Kia-Hyundai's strategy at the moment is to design extremely competitive EVs and only actually build as many of them as they need to pass regs. The luxury brands are building the most desirable models they can, at a price few can afford, and just putting as many out the door as possible. We're only just starting to get to a point where mass market-priced EVs can offer reasonable range and competitive performance.

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