Automakers in 11 states — namely California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New York, New Jersey, Oregon, Rhode Island and Vermont — are required to sell a particular amount of zero-emission vehicles by 2025. If they are not able to meet these requirements, then they have to buy regulatory credits from another automaker to meet these requirements. Tesla is one such automaker which sells electric cars exclusively.
It is a very profitable business for Tesla, which brought in $3.3 billion over the course of the last five years. It received $1.6 billion in regulatory credits which outweighs its net income of $721 million. The sale of regulatory credits rose to around $428 million in Q2 2020 up from about $354 million in Q1 2020 and just $111 million in Q2 2019. Tesla’s emission credits soared due to multiple reasons. One reason being the introduction of stringent emission norms by European Union which requires average carbon dioxide emission per kilometer to drop to 95 grams from an average of over 120 grams in 2018 for passenger cars.
Tesla reported 2020 adjusted net income which did not include $1.7 billion stock-based compensation of $2.5 billion. Tesla’s stock was up by 734% in 2020 making it one of the most valuable US companies in the world. Tesla’s automotive gross margins would have been lower by over 600 basis points in 2020 if not for regulatory credits sales. Its shares are now worth roughly as much as those of the combined 12 largest automakers who sell more than 90% of autos globally.
Tesla’s rapid growth is what differentiates it from other automakers. According to the forecast, it expects to do even better in 2021 while other automakers are struggling in the pandemic.
Even though Tesla is the current leading automaker of electric cars, the entire automotive industry is moving toward an all-electric future to meet tougher environmental regulations globally and to satisfy the growing appetite of electric vehicles. Other analysts say that Tesla’s cash flow won’t last for too long. In the medium-to long-term, mainstream automotive companies will scale up their zero-emission vehicle sales, reducing the need to buy credits from Tesla.