Most people see Tesla (TSLA) as a car company that makes money from selling and leasing electric vehicles.
While Tesla builds and markets primarily electric vehicles, it also designs and manufactures energy storage and solar generation systems.
Therefore, apart from vehicle sales, Tesla also makes money from selling and leasing electricity generated from solar energy systems built and designed by the company.
Best-selling energy storage products such as the Powerwall and Powerpack are another category of products that produce extra revenue streams for the company.
These are Tesla’s typical revenue sources.
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.
And that revenue source, created literally out of thin air, comes from the so-called “Regulatory Credits”.
This article will look at several statistics of Tesla’s regulatory credits, including annual and quarterly revenue figures, ratio to total revenue, growth rates, gross margin, and profit with and without regulatory credits.
Let’s get started!
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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.
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.
Are Regulatory Credits Sustainable
Tesla’s sales from regulatory credits totaled US$1.8 billion, US$1.5 billion, and US$1.6 billion for the years ended December 2022, 2021, and 2020, respectively.
That’s quite a lot of money from a “product” with zero production cost.
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.
Remember that Tesla’s electric vehicle market share totaled less than 5% in most regions, as shown in the following snapshot.
For this reason, Tesla’s sales of regulatory credits will be there and 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 36% year over year since 2013, according to the results in the plots below.
How Regulatory Credits Contributes To Sales
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 2022, Tesla’s regulatory credits revenue alone comprised around 2.5% of the total automotive revenue, down from 3% in fiscal 2021.
Regulatory Credits Revenue By Year
According to the chart above, Tesla’s sales of regulatory credits have significantly risen since fiscal 2012, reaching US$1.78 billion as of fiscal 2022, up 21% over 2021 or 13% over 2020.
As seen 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 helps to boost margins and profitability.
Regulatory Credits Revenue By Quarter
Tesla earned US$554 million, US$282 million, and US$521 million in regulatory credits revenue in 3Q 2023, 2Q 2023, and 1Q 2023, respectively.
Although the quarterly regulatory credits revenue seems flat over the past several quarters, it is on the rise in the long term.
Regulatory Credits Revenue By TTM
Tesla’s TTM regulatory credits revenue reached a record figure of US$1.82 billion in fiscal 3Q 2023, up 12% over the same quarter a year ago.
The TTM plot shows that Tesla’s sales of carbon credits have been steadily on the rise, albeit at a slower pace in recent years.
Regulatory Credits Revenue YoY Growth Rates
The growth of Tesla’s revenue from regulatory credits has significantly slowed over the past several quarters.
As of 3Q 2023, Tesla registered a YoY growth rate of 12.4% for the TTM regulatory credits revenue.
The growth rates averaged about 7.4% for the past four quarters.
Regulatory Credits To Total Revenue Ratio
Tesla’s regulatory credits revenue made up only 2.2% of the company’s total revenue in fiscal 2022.
This ratio has been on the decline and may further decline in fiscal years 2023, 2024, and 2025.
The continuous decline of the ratio shows that Tesla’s sales of other products, particularly in the automotive sector, have grown much faster.
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 sales costs.
Projected Regulatory Credits Revenue
At about 2% of revenue projected for fiscal 2023, Tesla’s regulatory credits revenue may reach US$1.9 billion by the end of fiscal 2023.
The carbon credit revenue is estimated to reach US$2.1 billion and US$2.3 billion in fiscal 2024 and 2025, respectively.
Regulatory Credits Revenue Per Car Delivered
From a per-vehicle perspective, Tesla earned US$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 has significantly declined since 2015, from US$3,340 per vehicle delivered in 2015 to US$1,352 per vehicle delivered as of 2022.
By the end of fiscal 2023, if Tesla were to deliver 2 million vehicles and earn US$1.9 billion in regulatory credits revenue, the per car revenue will come to a much lower figure, only at US$970.
The continuous decline in regulatory credits revenue per car suggests that Tesla will earns less carbon credits revenue per vehicle sold in the future.
Automotive Gross Margin W/Wo Regulatory Credits
Critics have argued that the sales of regulatory credits have artificially boosted Tesla’s profitability, and thus the company’s 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 start producing EVs.
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 Q3 2023 when carbon credit sales were considered.
In 3Q 2023, Tesla’s automotive gross margin bumped up to 21% after accounting for the sales of regulatory credits.
Tesla’s automotive gross margin was only 19.5% without carbon credit revenue for the same period.
In short, Tesla’s regulatory credits revenue has artificially boosted the company’s automotive gross margin.
Operating Profit W/Wo Regulatory Credits
Is Tesla profitable without regulatory or emission credits revenue?
Yes, Tesla’s operating profit surged to US$11.9 billion as of the end of 2022, even without the contribution from regulatory credits revenue.
In fiscal 3Q 2023, Tesla made US$8.9 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.
Net Profit W/Wo Regulatory Credits
Similarly, Tesla’s net profit came in at US$10.8 billion as of fiscal 4Q 2022, excluding sales of regulatory credits.
Tesla’s profit came in at US$8.9 billion in fiscal 3Q 2023 on a TTM basis, excluding regulatory credit revenue.
Therefore, Tesla made substantial profits even without accounting for the sales of carbon credits.
Tesla reported US$1.8 billion in regulatory credits revenue in fiscal 2022.
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.
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, etc., which are available in Tesla Update Letters and Presentations.
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.
The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.
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