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CNN
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For years, Tesla has earned billions of dollars from its competitors just for selling electric vehicles. But that windfall is about to go away, just when the company may need it the most.
Regulatory credit sales have been a huge source of revenue for the automaker, which currently faces a sales and profit slump. Legacy automakers purchase credits from Tesla to keep selling gas-burning cars that would otherwise violate emission regulations and cost them a fine.
But the Republican tax and spending bill passed earlier this month removes that financial penalty for automakers, meaning they will no longer have any incentive to purchase these regulatory credits from Tesla.
The loss of such credits hasn’t gotten nearly as much attention as the blowback to Tesla CEO Elon Musk’s alliance, then battle, with President Donald Trump or the elimination of the $7,500 tax credits for EV buyers. But removing those regulatory credits from Tesla’s balance sheet could spell disaster for the company’s financial future, perhaps even resulting in ongoing losses.
According to a recent note from analysts at William Blair and Co., the automakers “that fail to meet standards no longer incur fines, eliminating market demand for Tesla’s credits.” The analysts expect Tesla’s regulatory credit revenue to fall by 75% next year and disappear completely by 2027.
That will “result in a direct hit to profitability (for Tesla),” the note said.
Tesla did not respond to a CNN’s request for comment on the change in regulatory credit sales.
Until now, the US — like many governments — has had a credit system to incentivize auto companies to meet environmental regulations. It awarded credits to auto companies that met emissions standards and imposed financial penalties on those that didn’t. For automakers that primarily sell gasoline-powered cars, they could buy credits from automakers that sell low-emission vehicles, like Tesla, to avoid fines they otherwise would have to pay.
For Tesla, regulatory credit sales alone have brought in $10.6 billion since 2019. There are some quarters, like earlier this year, where credit sales exceeded the company’s total net income — meaning the company would have lost money without them.
And early in its history, when Tesla was still ramping up production of electric cars, the regulatory credits were crucial for keeping the lights on during a severe cash crunch.
“These regulatory credit sales are the reason that Tesla exists today,” said analyst Gordon Johnson, one of the harshest critics of Tesla on Wall Street.
For most of the last four years, the company has reported net income beyond its regulatory credit sales, even as the credits themselves brought in billions of dollars. But its profit margins have been getting thinner after peaking in early 2022, making the credit sales more important.
But the loss of the credit sales is just one of many problems at Tesla. The company reported a record drop in sales in its last two quarters due to increased competition for EVs and backlash from some buyers to CEO Elon Musk’s political activities. Tesla reported a plunge in profitability in the first quarter of this year and is forecast to report another steep drop in second-quarter results due on Wednesday.
The credits sales might not end immediately if legacy automakers honor their long-term contracts with Tesla. But Johnson says that some automakers may try to get out of those credit purchase contracts early.
He predicts that Tesla’s credit sales could vanish as quickly as the third quarter of this year or the start of 2026. That, he said, could cause Tesla to start reporting quarterly net losses once again.
“Without regulatory credit sales, Tesla loses money in its core business,” he said.
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