Tesla's easy money from regulatory credits set to dry up amid weakening sales
SAN FRANCISCO (Reuters) -A key driver of Tesla's profit is disappearing fast as the U.S. government changes policies on an environmental asset known as regulatory credits.
Investors are likelyto have a number of questions for Chief Executive Elon Musk when Tesla reports second-quarter results on Wednesday. Among them are how fast the EV maker can turn a trial robotaxi program into a money-making business, how to avoid a decline in sales for the second year in a row, and Musk's possible political plans.
Less sexy, perhaps, is the issue of regulatory credits, which are bought by traditional automakers from electric-vehicle companies to make up for the tailpipe pollution from their gasoline-powered vehicles. But this income segment is crucial for Tesla's finances, having been the main driver of its profit in the first three months of the year.
Without the income from those credits, sold to internal combustion engine automakers, Tesla would have reported a first-quarter loss, and Musk may be pressed to say how long he thinks Tesla will be able to sell credits.
The U.S. government incentivized zero-emission vehicle production by giving credits to EV makers while imposing hefty penalties on combustion engine vehicle manufacturers that fail to meet emission standards. The traditional automakers can avoid the fines by purchasing credits from companies like Tesla.
Recent legislation passed under the U.S. President Donald Trump, however, is set to eliminate fines for automakers that fail to meet National Highway Traffic Safety Administration's Corporate Average Fuel Economy standards — which underpin much of the demand for these regulatory credits.
"They are making conventional ICE vehicles more competitive while making EVs less competitive," said Batt Odgerel, a director at the Energy Policy Research Foundation, referring to Congress, Trump and the federal government.
Tesla risks losing revenue from the credits as well as market share, he added.
The future of two other sources of credits - from the U.S. Environmental Protection Agency and California's zero-emission vehicle program - is uncertain, with proposed rule changes and political and legal challenges.
"That is certainly likely to be a big loss of revenue for automakers" that were selling credits, added Chris Harto, a senior policy analyst at Consumer Reports. Tesla has reported more such sales than anyone else in the automotive sector.
FASTER DECLINE THAN EXPECTED
One question for Tesla is how fast the credit sales are falling and whether the EPA and California transactions are holding up for now. Other credit producers include smaller EV playersRivian and Lucid.
Analysts at William Blair calculate that about three-quarters of Tesla's credit revenue comes from CAFE standards. Within days of the new law, they slashed estimates for Tesla's 2025 credit revenue by nearly 40% to about $1.5 billion. They expect it to plummet to $595 million next year, before being wiped out in 2027.
That is a faster decline than seen by many on Wall Street. Tesla's revenue from credit sales will fall 21% this year to $2.17 billion and fall consistently in the coming years, according to 14 analysts polled by Visible Alpha this month.
"The elimination of the corporate average fuel economy (CAFE) fines requires a reset in expectations," the William Blair analysts said in their note earlier this month.
Revenue from credits wasalways expected to dwindle as traditional automakers ramped up production of zero- or low-emission cars, but not so fast. Tesla has acknowledged its financials would be "harmed" if demand and prices of credits dropped. It did not respond to a request for comment.
The credits, which have virtually no cost to produce, were instrumental to keeping Tesla profitable several years ago. While surging Model Y demand once pushed Tesla's profit well above regulatory credit income, recent sales declines and aggressive price incentives have meant regulatory credits are once again a key support for profit.
Tesla's loss is a win for internal combustion engine automakers such as General Motors, Ford and Honda, and it comes on top of a second win - the early end of a $7,500 U.S. tax credit for EVs, which now will happen at the end of September.
(Reporting by Abhirup Roy in San Francisco and Akash Sriram in Bengaluru; Editing by Peter Henderson and Matthew Lewis)
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Star
an hour ago
- The Star
US, EU trade talks boosted by Trump's agreement with Japan
FILE PHOTO: Stacked containers and cranes are shown at the Port of Los Angeles in Los Angeles, California, U.S., November 22, 2021. REUTERS/Mike Blake/File Photo BRUSSELS/WASHINGTON (Reuters) -The European Union and the U.S. are heading for a potential trade deal that includes a 15% U.S. baseline tariff on EU goods and possible exemptions, two European diplomats said on Wednesday, potentially moving President Donald Trump closer to securing another major trade agreement hours after he unveiled one with Japan. European negotiators were hoping to reach an agreement to dodge the 30% tariff rate Trump has said he would impose on imports from the 27-nation blocon August 1. The rate, which could also extend to cars, would mirror the framework agreement the U.S. has struck with Japan, which Trump announced late on Tuesday. The deal could include exemptions for some EU goods, the diplomats said. As talks continued, the European Commission said it would press on with potential counter-measures in case a deal was not reached. EU member states were set to vote on 93 billion euros of counter-tariffs on U.S. goods on Thursday, European diplomats said. A broad majority of members support using anti-coercion instruments if there is no deal, they said. Trump was hoping for a boost from the complicated deal reached with Japan, the largest foreign investor in the U.S., which included a $550 investment and loan pledges from Japan and its commitment to buy 100 Boeing airplanes and boost purchases of U.S. agricultural products. Tariffs on Japan's auto sector will drop from 27.5% to 15% as part of the agreement, reviving hopes for a similar deal for EU cars. Asian and European stock markets rallied as investors cheered that agreement, but U.S. stocks showed a more modest rise and earnings reports were gloomy. U.S. businesses making everything from chips to steel reported downbeat results on Wednesday, revealing how the Trump administration's chaotic trade policy has hurt profits, added to costs, upended supply chains and weighed on consumer confidence. Trump said late on Tuesday that other countries would be coming for talks this week and governments were scrambling to close trade deals before next week's deadline that the White House has repeatedly pushed back under pressure from markets and intense lobbying by industry. AUTO TARIFFS Automobile stocks led the climb of European shares after the Japan deal spurred hopes that the U.S. was budging over tariffs on EU cars. EU officials have previously said Washington has shown little sign of doing so. U.S. Treasury Secretary Scott Bessent said in an interview with Bloomberg Television that Japan received the 15% rate on auto tariffs "because they were willing to provide this innovative financing mechanism" that he did not think other countries could replicate. Trump, however, has appeared open to a range of options as the U.S. negotiates trade deals. "I will only lower tariffs if a country agrees to open its market," Trump wrote in a social media post on Wednesday. In addition to talks in Washington, the European Trade Commissioner Maros Sefcovic planned to speak with U.S. Commerce Secretary Howard Lutnick on Wednesday from Brussels. (Reporting by Philip Blenkinsop in Brussels and Trevor Hunnicutt in Washington; Additional reporting by Bhargav Acharya and Susan Heavey; Writing by Doina Chiacu; Editing by Paul Simao)
The Star
5 hours ago
- The Star
Amphenol forecasts upbeat quarterly results on strong demand for electronic equipment
FILE PHOTO: Aerospace components manufactured by Amphenol are displayed at the 54th International Paris Airshow at Le Bourget Airport near Paris, France, June 21, 2023. REUTERS/Benoit Tessier/File Photo (Reuters) -Amphenol forecast third-quarter results above Wall Street estimates on Wednesday, after seeing strong demand for its products such as cables, sensors and antennas, sending its shares up 4%. Massive investments by technology and defense firms in new technologies like artificial intelligence, which require significant computing infrastructure, have boosted demand for Amphenol's equipment. The company's communications solutions segment, which makes high-speed cable and antennas, reported sales of $2.91 billion in the second quarter, more than doubling its sales from a year ago. Total second-quarter sales were $5.65 billion, above estimates of $5.04 billion, according to data compiled by LSEG. The Connecticut-based company forecast third-quarter revenue between $5.4 billion and $5.5 billion, a growth of about 34% to 36% from a year ago. Analysts expected $5.25 billion. Amphenol also projected quarterly adjusted earnings per share between 77 cents and 79 cents, above expectations for 69 cents. Amphenol provides high-speed cables, sensors and antenna solutions for end markets such as automotive, commercial aerospace, defense, industrial and data communications. (Reporting by Harshita Mary Varghese in Bengaluru; Editing by Sahal Muhammed)
The Star
5 hours ago
- The Star
White House unveils artificial intelligence policy plan
WASHINGTON (Reuters) -The White House released an artificial intelligence (AI) policy plan on Wednesday spelling out priorities for the U.S. to achieve "global dominance" in the sector. U.S. President Donald Trump's plan calls for open-source and open-weight AI models to be made freely available by developers for anyone in the world to download and modify. The plan also calls for the Commerce Department to research Chinese AI models for alignment with Chinese Communist Party talking points and censorship. As previously reported by Reuters, it adds the federal government should not allow AI-related federal funding to be directed toward states with "burdensome" regulations. (Reporting by Chris Sanders, writing by Maiya Keidan)
