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How Much Revenue Did Tesla Make From Regulatory Credits?

A Tesla Model S. Image source: Flickr Image.

Tesla makes the most money from selling and leasing electric vehicles, solar energy systems and energy storage products.

In addition, Tesla also makes money from selling electricity generated from its own solar energy systems. Best selling energy storage products such as the Powerwall and Powerpack are another line of Tesla’s revenue generators.

These are the typical money-making products for Tesla. But what you may not know is that Tesla has another source of income that has been contributing hundreds of millions of dollars every quarter, and more than a billion dollars as of 4Q 2020, to the company’s coffers.

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

What are Regulatory Credits?

Regulatory Credits are credits or points given by the state and federal government 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 certain 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 be in compliance with the requirements is to either improve their own vehicles’ emission or switch to manufacturing emission-free electric vehicle for 100% compliance or to 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 the credits to comply with the laws.

ZEV and GHG Regulatory Credits

Since the vehicles produced by Tesla emit zero-emission, over the years, Tesla has earned a substantial amount of “Regulatory Credits” or sometimes referred to as ZEV (Zero-Emission Vehicles) credits under the state of California, which Tesla can sell to other auto manufactures.

The GHG credit or Green House Gas credit is another regulatory credit similar to ZEV credit where it’s applicable at the federal level requiring automakers to comply with the emission standard.

Based on the 2020 annual report, Tesla generated sales that totaled as much as $1.58 billion, $594 million and $419 million for the years ended on December 2020, 2019 and 2018 respectively from selling regulatory credits alone.

That’s quite a lot of money from a “product” literally with zero cost to produce.

The good news for Tesla’s investors is that the revenue from the sales of regulatory credits would most likely be increasing over time in the future when Tesla accelerates its goal of transitioning the world to renewable energy.

Keep in mind that Tesla has only commanded a market share of less than 1% in most of the regions in the world as shown in the following snapshot.

Tesla market share by region

Tesla market share by region. Source: Tesla 4Q 2020 Update Letter

For this reason, Tesla’s sales of regulatory credits will most likely be increasing or even surging in the foreseeable future when the world is slowly transitioning from fossil fuel burning to all-electric vehicles.

In fact, we are seeing that Tesla’s regulatory credits sales have been increasing by an average of 85% year over year since 2012, according to the results in the plots below.

Tesla’s Sale of Regulatory Credits

Tesla regulatory credits revenue stream

Tesla regulatory credits revenue stream

The diagram above shows Tesla’s business segment where the regulatory credits revenue is produced.

As seen from the diagram, the sales of regulatory credits are recognized and reported under Tesla’s automotive sector.

Further down the automotive sector, 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 an aggregated automotive sales revenue.

As of 4Q 2020, the percentage of Tesla’s carbon credits revenue to total automotive revenue was roughly 4% on a quarterly basis.

On a yearly basis, Tesla’s carbon credits revenue made up nearly 6% of the total automotive revenue in 2020.

Tesla’s Regulatory Credits Revenue (Yearly)

Tesla annual regulatory credits revenue

Tesla annual regulatory credits revenue

The chart above shows Tesla’s revenue from regulatory credits for the past 8 years from 2012 to 2020 on a yearly basis.

According to the chart, the long-term trend of the plot shows that the sales of regulatory credits have been increasing year over year by an average growth rate of 85% between 2012 and 2020.

Over the chart, Tesla’s regulatory credits revenue reached the highest at nearly $1.6 billion in 2020, a record high for the company.

On an absolute value basis, Tesla managed to recognize only $41 million in 2012 but nearly $1.6 billion in 2020, all from the sales of regulatory credits alone.

Over the 9-year period, Tesla’s regulatory credits sales have grown at an astounding growth rate of 85% on average.

According to the chart, we can see that the growth of Tesla’s regulatory credits revenue accelerates the most from 2016 to 2020, especially in 2020 where the YoY growth rate surged to more than 150%.

The billion-dollar sales of regulatory credits in 2020 have certainly helped Tesla to boost its gross margin and profitability at a time when the company has been aggressively pricing its vehicles in order to increase its market share.

Tesla’s Regulatory Credits Revenue (Quarterly)

Tesla quarterly regulatory credits revenue

Tesla quarterly regulatory credits revenue

On a quarterly basis, Tesla’s regulatory credits revenue has been increasing steadily over the years, with 2020 being the best performing year when regulatory credits revenue hit a record high of more than $300 million in 4 consecutive quarters.

According to the chart, in the first 3 quarters alone in 2020, Tesla has raked in nearly $1.2 billion of sales in regulatory credits, including both ZEV and GHG credits.

In 2020 Q4, Tesla’s sales of regulatory credits hit $400 million. Cumulatively, Tesla’s sales of regulatory credits totaled nearly $1.6 billion by 4Q in 2020.

Ratio of Tesla’s Regulatory Credits to Total Revenue

Tesla regulatory credits revenue to total revenue ratio

Tesla regulatory credits revenue to total revenue ratio

The chart above shows the ratio of regulatory credits revenue with respect to total revenue expressed in percentage.

From the chart, the percentage has dropped drastically from 10% in 2012 to just 2.4% in 2019.

However, the percentage ticked slightly higher to 5% in 2020 when Tesla reported a record high of carbon credits sales of $1.58 billion.

The continuous decline of the ratio shows that the sales of regulatory credits with respect to total revenue has been getting insignificant.

In this aspect, Tesla’s total sales have grown at a much faster rate than the rate of growth of carbon credits.

However, the sales of carbon credits in 2020 has outpaced that of total revenue as reflected from the surge of the ratio to 5% from 2.4% from the prior year, representing a growth of more than 100%.

The significant sales of Tesla’s regulatory credits in 2020 has perhaps indicated that the sales of electric cars have accelerated at a much faster pace in the same year.

While Tesla may have posted record sales of regulatory credits in 2020, the ratio represents only 5% of the company’s total revenue.

On the surface, the 5% ratio may seem negligible, it was actually almost as big as the solar revenue that Tesla generated in 2020.

As a whole, Tesla’s other revenue sources, including automotive sales, were still the major revenue contributor to the company.

Tesla Regulatory Credits Revenue Growth Rate

Tesla regulatory credits revenue growth rate

Tesla regulatory credits revenue growth rate

The plot above shows the year on year (YoY) growth rates of Tesla’s regulatory credits revenue from 2013 to 2020.

From the plot, YoY growth rate had been positive in all years except in 2015 when the growth rate turned negative at -22%.

In 2020, Tesla reported one of the best growth rates of 166% for the regulatory credit revenue when it reached beyond $1 billion for the first time since its IPO.

In a separate calculation, the average annual growth rate for sales of regulatory credits was about 85% from 2012 to 2020.

I believe that Tesla’s carbon credits sales will continue to grow at a double-digit growth rate, considering that the adoption of electric vehicles is still in its infancy and represents less than 5% of global vehicle sales.

Effect of Regulatory Credits on Gross Margin (Quarterly)

Tesla automotive gross margin (quarterly)

Tesla automotive gross margin (quarterly)

The chart above shows Tesla’s quarterly gross margin comparison for automotive revenue with and without regulatory credit revenue.

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

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

Tesla may run out of emission credits buyers in the future when most, if not all, automakers switch to manufacturing EVs.

According to the chart, Tesla’s regulatory credits revenue has certainly helped to boost automotive gross margin.

In Tesla’s case, the improvement in gross margin can be as low as 2% to as high as 6%.

For instance, Tesla reported the biggest 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 are seeing a 3% gross margin improvement in Q4 2020 when ZEV and GHG credits sales were recognized as part of the automotive revenue.

In 2020 4Q, Tesla’s automotive gross margin was 24% when emission credits sales were included.

However, its automotive gross margin dropped to only 21% when emission credits revenue was excluded.

In short, it’s without a doubt that the regulatory credits revenue has artificially boosted not only the gross margin but also the profitability.

Effect of Regulatory Credits on Gross Margin (TTM)

Tesla automotive gross margin (ttm)

Tesla automotive gross margin (ttm)

To smooth out the quarterly plot, I have created the trailing 12-months (TTM) plot as shown in the chart above.

Again, Tesla reported the biggest improvement in the automotive gross margin in 2020 when regulatory credits sales were the highest.

On a TTM basis, Tesla’s automotive gross margin with and without regulatory credits sales differed by as much as 4% in most quarters in 2020.

Over the chart, we can see that the 2 plots started to diverge significantly since the 1st quarter of 2020, indicating that the regulatory credits did help to boost the gross margin considerably.

With the help of emission credits revenue, Tesla’s TTM automotive gross margin reached nearly 26% in 2020 Q4.

The automotive gross margin dipped to only 21% on a TTM basis when we excluded the sales of the emission credits in the same quarter.

Conclusion

Tesla’s regulatory credits revenue has been growing at an average annual growth rate of 85% between 2012 and 2020, with 2020 being the best year when Tesla posted emission credit sales that surged beyond $1 billion.

In 2020, Tesla reported a regulatory credit revenue of $1.58 billion, beating all prior records.

Albeit less significant in contributing to total revenue, the regulatory credit sales have helped Tesla to improve its automotive gross margin.

The improvement can range from 2% to 6%, depending on the amount of carbon credits sales.

We have seen that the larger the revenue from regulatory credits, the bigger the improvement in automotive gross margin.

References and Credits

1. All information in this article was obtained and referenced from Tesla Update Letters and Presentations.

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

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{ 9 comments… add one }
  • David Dodini June 29, 2020, 7:30 pm

    Battery Electric Vehicles are not emissions free. It would be great to see you cover the true emissions of these vehicles both in terms of manufacture and the source of the energy. The public deserves to know, since after all they are paying for it via the subsidies as well as the passed on costs of the regulatory credits.

  • Bob Tessier September 9, 2020, 5:40 pm

    Revenue is fine but do they EARN any profits from vehicle production solely? It seems the credits make them profitable and without them they lose money on every car.

    • cckean September 9, 2020, 9:47 pm

      Even with emission credit revenue included, Tesla doesn’t seem to make any meaningful profits!

    • peter danczewski October 22, 2020, 5:21 am

      EV regulatory credits are part of the business model, not just for TSLA but for other automobile manufacturers. TESLA is way ahead of the game and therefore is reaping the highest revenues from these credits. I don’t understand why people get hung up on one aspect of this company. We should be concerned with companies that are buying these credits just to meet emissions standards.

  • Elia Mazzawi September 11, 2020, 2:32 am

    The Zev credit system is too complicated. The government should simply replace it with a flat tax on carbon.

    Tesla doesn’t need a $1b per year government handout.

    • cckean September 11, 2020, 6:44 pm

      Apparently, this money does not come from the government. It comes from other automakers who has yet to comply with the emission standard. The government only acts as the moderator or the middleman.

  • Frankie Boyd October 22, 2020, 7:28 pm

    Just exactly how do these regulatory credits work. Does TESLA sell vehicles, and/or vehicle technology to the ” Big Three”, etc..?

  • AgentZero October 23, 2020, 11:55 am

    What happens when everybody starts making electric vehicle ? How will Tesla be profitable ?

    • cckean October 23, 2020, 1:51 pm

      Then Tesla will have nowhere to sell its regulatory credits!

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