More than a dozen in the U.S. follow the standards set forth in California’s Zero Emission Vehicle program. As part of the program, a certain percentage of an automaker’s sales are required to be either full battery-electric, hydrogen fuel-cell, or a plug-in hybrid. If the automaker fails to meet this threshold, they are fined. But there’s a catch to it: automakers that have an excess of these credits can sell them to other, non-compliant automakers like an elaborate regulatory trading card game that benefits automakers who heavily invested in ZEV manufacturing early on.
Tesla is no stranger to the ZEV credit game. In fact, the Texas-based company has used its position as an electric-only automaker to its advantage, raking in billions of dollars in revenue by selling these regulatory credits to other automakers. Now it’s sitting on the largest stockpile of these credits in the U.S., and according to Automotive News, despite other automakers jumping on the EV bandwagon, these credits may become even more valuable to Tesla over the next few years.
The projected increase in demand is thanks to the newly minted EV tax credit reform. Despite more than 50 ZEV vehicles being on sale today, only 21 are actually assembled in North America, a prerequisite for the tax credit to even be considered. It’s possible that even fewer qualify for the $7,500 tax credit under the strict standards that are set to shape vehicle eligibility over the next few years.
This eligibility has become the subject of a heated international debate—something that foreign automakers without U.S. production facilities argue will give protectionism-era advantages to domestic manufacturers. And if there is a sharp dip in ZEV-qualifying vehicle sales simply because a model doesn’t qualify for the EV tax credit, automakers that fail to meet their ZEV credit requirements could also be required to pay out hefty fines.
It’s not out of the ordinary for an automaker to fail to meet ZEV requirements on its own since credits can only be obtained by selling a vehicle in a state that participates in the program by selling an eligible vehicle. To make it even more complicated, one vehicle sale doesn’t equal one credit. A vehicle can be worth as little as zero if it has no electrification whatsoever, or capped at four credits if its range (calculated on the Urban Dynamometer Driving Standard, not the EPA-certified number) is high enough. If an automaker fails to meet its ZEV credit requirements, it can opt to purchase credits from other OEMs which have a surplus. This is something that Tesla has used as a reliable revenue stream for some time, generating around $6.3 billion since 2013.
Automakers that don’t qualify for the new EV tax credit may see their sales plummet in ZEV-participating states simply because other qualifying vehicles are more attractively priced. This could lead to an imbalance in ZEV credit compliance and require automakers to lean more heavily on automakers like Tesla to purchase credits.
The overall fine for each credit not produced by an automaker is $5,000. This gives Tesla (and other manufacturers with a surplus of credits) an opportunity to swoop in and provide the necessary credit to competitors at a reduced rate. While the exact price at which each credit is sold is unknown, Automotive News estimates that Tesla earns approximately $3,500 for each credit. This means that an automaker out of compliance can save around $1,500 per credit (30%) by purchasing them directly from Tesla rather than paying a regulatory fine.
If automakers begin to see a skewing in EV purchases due to the EV tax credit as predicted, Tesla is sitting on a gold mine of stockpiled credits. In 2020, California reported that Tesla had 752,445 credits—an amount worth around $2.6 billion if each credit is sold at $3,500. The automaker with the next highest amount of credit is Toyota at 187,045, followed by General Motors at 184,204. However, the buying window may be slim, as many manufacturers and battery producers are already planning U.S. facilities with projected go-live dates of 2025 or sooner, meaning that Tesla may only have a slim chance to offload a high number of credits before they are no longer as in-demand.
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