Tesla Regulatory Credits Revenue And Carbon Credit Per Car

A Tesla Model S. Image source: Flickr Image.

While Tesla builds and markets primarily electric vehicles, it also designs and manufactures energy storage and solar generation systems.

Therefore, Tesla also makes money from selling and leasing electricity generated from solar energy systems built and designed by the company, in addition to vehicle sales.

Moreover, Tesla also generates significant energy revenue from selling energy storage products such as the Powerwall and Powerpack.

These are Tesla’s typical revenue streams. However, you may not know that Tesla has another source of income that has contributed hundreds of millions of dollars to the company’s bank accounts.

That revenue source, created literally out of thin air, comes from the so-called “Regulatory Credits”.

This article looks at several statistics of Tesla’s regulatory credits, including the annual and quarterly revenue figures, ratio to total revenue, growth rates, gross margin, and profit with and without regulatory credits.

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Definitions

To help readers understand the content better, the following terms and glossaries have been provided.

Regulatory Credits Revenue Per Vehicle: Tesla’s regulatory credits revenue per vehicle is calculated by dividing the total revenue Tesla earns from selling regulatory credits in a given period by the total number of vehicles it delivers in the same period.

Regulatory credits are earned by Tesla for producing zero-emission vehicles and can be sold to other manufacturers that need them to comply with environmental regulations. This revenue is an additional income stream for Tesla, separate from the income generated by selling its electric vehicles (EVs).

The specific amount per vehicle can vary each quarter depending on the total amount of regulatory credits sold and the number of vehicles delivered.

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What are Regulatory Credits?

Regulatory Credits are credits or points the state and federal governments provide for contributing zero pollution to the environment.

Basically, in the state of California and some other states in the US, auto manufacturers such as Tesla, Ford, General Motors, and so on are required by laws to meet specific minimum emission standards for all the vehicles they produce and sell.

Otherwise, they will face hefty fines or risk having their license revoked by the state government for failing to meet these emission standards.

In simple terms, auto manufacturers are required to meet these emission standards, and the only way for them to comply with the requirements is to either improve their own vehicles’ emissions or switch to manufacturing emission-free electric vehicles for 100% compliance or purchase regulatory credits from other automakers that have excess credits such as Tesla.

The laws provide that automakers such as Tesla may keep the excess credits if they earn more credits than the minimum amount required. Auto manufacturers with a surplus of credits may sell their credits to other manufacturers, who can use them to comply with the laws.

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ZEV and GHG Regulatory Credits

As electric vehicles emit zero-emission, Tesla has earned a substantial amount of “Regulatory Credits”, referred to as ZEV (Zero-Emission Vehicles) credits under California, which Tesla can sell to other auto manufacturers.

The GHG credit or Green House Gas credit is another term for regulatory credit similar to the ZEV credit.

The GHG is applicable at the federal level, requiring automakers to comply with the emission standard.

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Are Regulatory Credits Sustainable?

Tesla’s sales from regulatory credits totaled US$1.8 billion, US$1.8 billion, and US$1.5 billion for the years ended December 31 2023, 2022, and 2021, respectively.

The revenue that Tesla has earned from regulatory or emission credits is quite substantial.

The good news for Tesla’s investors is that the revenue from sales of regulatory credits would most likely be sustainable in the foreseeable future as long as the production of fossil-fueled vehicles persists and there is a demand for this type of vehicles.

As of 2024, Tesla has a market share of less than 5% of the entire automotive market in most regions, as shown in the following snapshot.

tesla-market-share-global

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For this reason, Tesla’s sales of regulatory credits will continue and may even surge when Tesla gains a more significant share of the automotive market.

In fact, Tesla’s regulatory credit sales have increased by an average of 18% year over year since 2021, according to the results in the plots below.

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Who Buys Tesla Regulatory Credits?

Tesla sells regulatory credits to other automakers that need them to comply with emissions standards. These buyers are typically manufacturers who aren’t producing enough electric vehicles (EVs) or other zero-emissions vehicles to meet regulatory requirements set by governments around the world.

By purchasing credits from Tesla, which has a surplus thanks to its all-electric lineup, these companies can avoid significant fines and continue selling their more traditional combustion engine vehicles in certain markets.

The specific buyers often vary and can include major automotive companies, but the details of these transactions are not always publicly disclosed.

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How Regulatory Credits Contributes To Sales?

Tesla regulatory credits revenue

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The diagram above shows that Tesla’s regulatory credits revenue falls under the automotive segment.

Tesla’s regulatory credits revenues are combined and lumped together with other revenue sources, including new vehicle deliveries, sales of Supercharging and autopilot, etc., to arrive at the aggregated automotive revenue.

In fiscal 2023, Tesla’s regulatory credits revenue alone comprised around 2.0% of the total automotive revenue, down sligthly from 2.5% in fiscal 2022.

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Regulatory Credits Revenue By Year

Tesla’s regulatory credits revenue by year

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Tesla’s sales of regulatory credits have significantly risen since fiscal 2012, reaching $1.79 billion as of fiscal 2023, up 22% over 2021 but roughly in line with 2022 result.

As mentioned in prior discussions, Tesla’s sales of regulatory credits contribute directly to the automotive revenue. As a result, Tesla’s automotive gross margin has benefited immensely from the sale of regulatory credits.

You will see in the following discussion that Tesla’s regulatory credits revenue has helped to boost margins and profitability.

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Regulatory Credits Revenue By Quarter

Tesla’s regulatory credits revenue by quarter

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Tesla earned $442 million in quarterly regulatory credit revenue as of 1Q 2024, down 15% from a year ago.

Tesla has earned an average of $446 million in regulatory credit revenue per quarter between 1Q 2023 and 1Q 2024.

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Regulatory Credits Revenue By TTM

Tesla-regulatory-credits-revenue-by-ttm

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Tesla’s TTM regulatory credits revenue reached a record figure of $1.71 billion in fiscal 1Q 2024, up by $100 million over the same quarter a year ago.

The TTM plot shows that Tesla’s sales of carbon credits have been steadily increasing, but at a slower pace in recent years. Since 2021, Tesla’s TTM regulatory credits revenue has remained relatively flat.

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Regulatory Credits Revenue YoY Growth Rates

Tesla’s regulatory credits revenue growth rates

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The growth of Tesla’s revenue from regulatory credits has significantly slowed over the past several quarters.

As of 1Q 2023, Tesla registered a YoY growth rate of just 5.7% for the TTM regulatory credits revenue. The growth rates have averaged only 2.9% each quarter since 1Q 2023.

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Regulatory Credits To Total Revenue Ratio

Tesla regulatory credits to total revenue ratio

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Tesla’s regulatory credits revenue made up only 2.0% of the company’s total revenue in fiscal 2023. This ratio has been declining and may further decline in fiscal years 2024 and 2025, due to the much faster revenue growth of other segments such as automotive and energy.

While the 2% ratio may seem negligible, it was almost as big as the solar revenue generated in fiscal 2020.

The best thing about carbon credit revenue is that it comes without cost of sales.

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Projected Regulatory Credits Revenue

Tesla-projected-regulatory-credits-revenue

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At about 2% of revenue estimated for fiscal 2024, Tesla’s regulatory credits revenue may reach $2.1 billion by the end of fiscal 2024.

In fiscal 2025, Tesla’s carbon credit revenue may reach $2.3 billion, constituting about 1.6% of the estimated total revenue of $146 billion.

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Regulatory Credits Per Car

Tesla-regulatory-credits-revenue-per-vehicle-sold

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The definition of Tesla’s regulatory credit revenue per vehicle is available here: regulatory credit revenue per vehicle.

From a per-vehicle perspective, Tesla earned $1,352 in regulatory credits revenue per car sold in fiscal 2022, a decline of 14% over 2021 and more than 50% over 2020. This figure reached just $990 per vehicle in fiscal year 2023.

Since 2015, Tesla’s sales of carbon credit per vehicle has significantly declined, from $3,340 per vehicle delivered in 2015 to less than $1,000 per vehicle delivered as of 2023.

By the end of fiscal 2024, if Tesla were to deliver 2.3 million vehicles and earn US$2.3 billion in regulatory credits revenue, the per car carbon credit revenue will come to a much lower figure, estimated at just $900.

The continuous decline in regulatory credits revenue per car suggests that Tesla will continue to earn less carbon credits revenue per vehicle sold in the future.

The reason for the decline is very obvious – the increase in Tesla’s vehicle sales volume and the decrease in revenue per vehicle over the years, as shown in this article: Tesla sales and revenue per vehicle.

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Automotive Gross Margin Excluding Regulatory Credits

Tesla’s automotive gross margin with and without regulatory credits revenue

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Critics have argued that the sales of regulatory credits have artificially boosted Tesla’s profitability and profit margin.

These arguments are valid to some degree because Tesla’s revenue from the sales of carbon credits may not be sustainable in the long run.

Tesla may run out of emission credit buyers in the future when most if not all, automakers are electrified.

According to the chart, Tesla’s regulatory credits revenue has helped boost automotive gross margin. In Tesla’s case, the improvement in automotive gross margin can be as low as 2% to as high as 6%.

For instance, Tesla reported the most significant jump in gross margin, an improvement of as much as 6% in Q2 2020, when regulatory credits revenue was recognized as part of the automotive sales.

Similarly, we see a 2% boost in automotive gross margin as of Q1 2024 when carbon credit sales were considered.

In 1Q 2024, Tesla’s automotive gross margin was bumped up to 19% after accounting for the sales of regulatory credits – only 17% excluding carbon credit revenue for the same period.

In short, Tesla’s regulatory credits revenue has artificially boosted the company’s automotive gross margin.

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Operating Profit Excluding Regulatory Credits

Tesla’s operating profit with and without regulatory credits revenue

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Is Tesla profitable without regulatory or emission credits revenue?

Yes, Tesla’s operating profit surged to $11.9 billion as of the end of 2022, even without the contribution from regulatory credits revenue.

In fiscal 1Q 2024, Tesla made $5.7 billion in operating income on a TTM basis, excluding regulatory credits revenue, which is also a record figure in the post-pandemic era.

Again, Tesla was profitable from an operational perspective with and without regulatory credit revenue.

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Net Profit W/Wo Regulatory Credits

Tesla’s net profit with and without regulatory credits revenue

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Similarly, Tesla’s net profit came in at $10.8 billion on a TTM basis as of fiscal 4Q 2022, excluding sales of regulatory credits.

In fiscal 1Q 2024, Tesla made nearly $12 billion in net profit in fiscal 1Q 2024 on a TTM basis, excluding regulatory credit revenue.

Therefore, Tesla made substantial profits even without accounting for the sales of carbon credits.

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Conclusion

Tesla reported US$1.8 billion in regulatory credits revenue in fiscal 2023, in line with 2022 result.

This revenue stream has been an important factor in Tesla’s financial success, particularly as the company continues to invest heavily in research and development for new electric vehicle models.

While some analysts have raised concerns about the sustainability of this revenue stream in the long term, Tesla has demonstrated its ability to generate significant profits even without the sale of regulatory credits.

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References and Credits

1. All financial figures presented in this article were obtained and referenced from Tesla, Inc.’s annual and quarterly reports, earnings releases, investor presentations, update letters, webcasts, etc., which are available in Tesla Update Letters and Presentations.

2. Featured images in this article are used under a Creative Commons license and sourced from the following websites: Ian Kennedy and Lubomir Panak.

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Disclosure

References and examples such as tables, charts, and diagrams are constantly reviewed to avoid errors, but we cannot warrant the total correctness of all content.

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