Tesla’s Automotive Sales Dropped By Over $1 Billion In Q1, But Another Revenue Stream Helped The Company Generate $354 Million - Forbes

Elon Musk Speaks At Satellite Conference In Washington, DC — Elon Musk, CEO at Tesla
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As Tesla TSLA posted quarterly earnings of $5.98 billion and beat analyst expectations by $140 million, the real surprise was that even with the COVID-19 pandemic shutting down factories, Tesla still turned a profit — and surprised Wall Street with a 650% beat on earnings per share.

According to its Q1 2020 update, while Tesla’s automotive sales dropped by over $1.2 billion in Q1, there’s one number that jumped 166% since last quarter: regulatory credits; in context, this means the revenue stream helped Tesla book a whopping $354 million in revenue.

So what are regulatory credits, who’s paying for them, and how is Tesla monetizing them?

Outsized Incentives For EV Makers

As the generally increasing trend of emissions is a cause for concern, some geographic areas have put together incentive programs for automakers that are committed to reducing emissions on the road.

For instance, California started a program called the Zero-Emissions Vehicle program, commonly known as “ZEV,” which mandates automakers to sell a benchmark of zero-emissions vehicles based on metrics like gasoline and diesel sales. Since its inception, ZEV mandates have been adopted by nine other states, including New York, Vermont, Massachusetts, and Maryland. Similar mandates have even been implemented overseas, particularly in Europe.

For EV makers like Tesla, mandates like these are no problem — and they’re even incentives to keep going. That’s because whenever traditional automakers aren’t able to hit their own benchmarks, they can buy credits from Tesla to offset their own emissions.

Slow Transition To EVs Fundamental To Tesla’s Regulatory Credits Revenue Growth

Since Tesla started selling emissions credits all the way back in 2010, the company has garnered huge customers including General Motors GM and Fiat Chrysler (the parent company of Dodge, Alfa Romero, and others).

The question is then: “Why don’t these giants just make EVs themselves instead of paying Tesla?” The answer: it all comes down to speed — and consequently fines.

Figure ES-7. Performance and Standards by Manufacturer, 2018 Model Year
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That is, while automakers are working fast to make emissions-neutral vehicles, their operation doesn’t financially allow them to work fast enough. Across the field, automakers are missing the mark as it relates to regulations — except Tesla, which far exceeds the benchmark it needs to hit on producing ZEVs.

So, automakers often have a choice: either buy ZEV credits or face billions in fines. Whether the credits come from Tesla or not, most automakers don’t have excess credits as Tesla does, a principle that fuels the growth of Tesla’s regulatory credits revenue stream.

Tesla’s Regulatory Credits Revenue Stream Has Visible Challenges

While emissions regulations have allowed Tesla to grow its credits revenue stream significantly over time, there are certainly challenges that stand in the way. Back in 2017, Trefis speculated in a piece it wrote for Forbes that the Trump administration could roll the ZEV program back, which would directly hurt Tesla’s revenue. There has been some indication of this intention, but nothing has been set in stone yet.

Aside from policy, as companies produce more EVs themselves, they may very well have the leeway to put up their own ZEV credits for grabs, flooding the market with supply and driving down value per credit.

So while Tesla’s regulatory credits revenue stream is currently doing well, the company won’t be without its challenges.

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