CNN —
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.
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