Tesla makes 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 Powewall and Powepack are another line of Tesla’s revenue generators.
These are the typical money-making machines for Tesla. But what you may not know is that Tesla has another source of income that is contributing hundreds of millions of dollars to the company’s coffers. And that revenue source comes from the so-called “Regulatory Credits”.
What is Regulatory Credits?
Regulatory Credits are literally 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 standard for all the vehicles they produce and sell. Otherwise they will face hefty fine 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 standard 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 automaker 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 credits similar to ZEV credit where it’s applicable at federal level requiring automakers to comply with the emission standard.
Based on the 2019 annual report, Tesla made about $594 million, $419 million and $360 million for the years ended December 2019, 2018 and 2017 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 is that the revenue from selling regulatory credits would most likely increase over time in the future and we have seen that it has been increasing by an average of 80% year over year since 2011 (results from the plots below).
Chart of Tesla Regulatory Credits Revenue
The chart above shows Tesla’s revenue from regulatory credits for the past 8 years from 2012 to 2019.
The long-term trend of the plot shows that regulatory credits revenue has been increasing year over year between 2012 and 2019. Regulatory credits revenue reached the highest value at nearly $600 million in 2019, a record high for the company since the start of the sales.
Over the span of the 8-years period, the growth of Tesla’s regulatory credits revenue from just $41 million to $600 million represents a growth rate of 15X. The figure in 2019 alone marks a growth of roughly 42% year on year when Tesla managed to earn $594 million compared to only $419 million in 2018 from regulatory credit sales.
The half a million dollar sales of regulatory credits may perhaps help Tesla to boost its profit margin at a time when the company has been aggressively pricing its vehicles at competitive figures.
Ratio of Tesla Regulatory Credits to Total Revenue
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% in 2019. The continuous decline of the percentage figure shows that the contribution of sales of regulatory credits to total revenue has been insignificant.
While Tesla posted record sales of regulatory credits in 2019, the result didn’t help to lift the ratio a bit, indicating that perhaps, Tesla’s other revenue sources such as automotive sales have grown at a much faster rate.
Tesla Regulatory Credits Revenue Growth Rate
The plot above shows the sequential growth rate of regulatory credits revenue from 2013 to 2019.
From the plot, sequential growth rate had been positive in all years except 2015 when growth rate turned negative at -22%. In 2019, Tesla reported a very impressive result for the growth of regulatory credit revenue when the percentage figure was nearly 42%.
In a separate calculation, the average growth rate for regulatory credits revenue was roughly 74% from 2013 to 2019.
The high double digit figure shows that Tesla regulatory credits revenue still has rooms to grow in the future considering that the adoption of electric vehicle is still in its infancy and represent less than 5% of global vehicle sales.
Chart of Tesla Quarterly Regulatory Credits Revenue
The plot above shows the quarterly regulatory credits revenue since 2018.
I could only get the data starting from 2018 as Tesla did not break down the annual regulatory credits revenue into quarterly numbers before 2018.
The quarterly data shows that regulatory credits revenue could rise and fall significantly from quarter to quarter. However, the year over year growth may show different story. As seen from the chart, year over year growth for quarterly sales have shown positive numbers in most of 2019 quarters.
Tesla’s regulatory credits revenue has been growing at an average annual rate of 74% between 2012 and 2019, with 2019 being one of the best year when Tesla posted a revenue of $594 million which represents a year over year growth rate of 42%.
Even though regulatory credits revenue has risen significantly over the past several years, its contribution to total revenue is getting less significant and was only 2.4% of total revenue in 2019.
Regulatory credits revenue should have years of growth to come since the adoption of electric vehicles has only just started.
References and Credits
1. All information in this article was obtained from Tesla Update Letters and Presentations.
Other posts that you might be interested:
- Tesla debt structure
- Revenue and gross margin comparison between Tesla and GM
- 3 minutes to get to know about Tesla business model
- A look at Tesla automotive leasing revenue
- General Motors frequently asked questions from investors
Readers, investors or visitors are free to use, copy, quote, distribute, modify, edit, share and link any materials in this webpage such as the charts, snapshots, texts, paragraphs and so on. All you need to do is provide credits such as a link or mention the name of this website.