If it wasn’t for these “regulatory credits”, Tesla would not have “a positive free cash flow.”
Tesla now gathers essential conditions to be among the S&P 500 index companies, such as an entire year of profits and a last quarter in the black. Although it is not a warranty against things going wrong, as some readers pointed out, it is a credibility achievement. Yet, what is the role of carbon credits in it? Autocar highlighted it is a relevant part of the equation based on the Q2 2020 numbers.
They were readily available at Tesla’s Q2 2020 report, but we do not remember anyone putting any emphasis on that prior to Jim Holder’s article. He mentions Tesla received $428 million as “regulatory credits.” If that does not seem like a fortune, it is worth remembering that this is more than Tesla received in 2018 alone: $419 million.
In 2019, Tesla got $593 million in carbon credits. With the $354 million in credits Tesla got in Q1 2020, H1 2020 already owes $782 million to these carbon regulations. We already told you Giga Berlin would be built entirely on carbon credits paid by FCA.
People may think about that as fantastic news. After all, legacy automakers are paying Tesla to electrify personal mobility, but this reasoning oversees a myriad of implications. First of all, because these with big numbers do not come directly from the core business of the company – selling cars. They are a side effect of them, one that may take a bigger role than it should.
The $428 million in carbon credits are just slightly more than the $418 million in “positive free cash flow” Tesla states it had in Q2 2020. If you compare that to Tesla’s net profit of $104 million, things get even uglier. Without these “regulatory credits,” Tesla numbers would be in the red. In Q1 2020, there was no positive free cash flow: Tesla lacked $895 million in that regard.
That alone could already concern even Tesla advocates, but there is more. One of the biggest points of pride the company and its followers have is they are helping save the planet against global warming. But are they?
A study from the Stanford Law School says that the California law for carbon credits says that “relying on carbon offsets to lower compliance costs risks lessening total emission reductions and increases uncertainty in whether an emissions target has been met.” In other words, allowing big automakers to “clean” their gas guzzlers by buying credits is not preventing them from selling these machines. It may even stimulate that.
If the message is really to help the planet get healthier, carbon credits should be something to avoid rather than to rely on. The less Tesla and other EV manufacturers sell them, the more legacy manufacturers will have to solve that on their own.
These credits could explain why Tesla wanted so badly to open its factory, disregarding Alameda County COVID-19 lockdown rules. If these carbon credits depend on the number of cars the company sells, putting them in customers’ hands becomes instrumental in obtaining them. In that sense, profits come from more than the difference in production costs and MSRP. What must be asked is how much these profits need carbon credits.
Apparently, that is a big chunk of the business. This misdirection in selling cars is what Holder discusses in his article. It could explain why Tesla 3D-printed parts instead of correcting them properly on the Model Y. Or why it is delivering so many cars with issues that even lousy quality control teams would avoid. What seems to matters is getting them shipped, even if they shouldn’t – and if that affects Tesla’s reputation.
Traditional companies are selling electric cars to cut their need to buy carbon credits. Some of them, such as Volvo and Hyundai, could be creating EV-only brands with an eye on this market. We’ll see respectively how Polestar and Ioniq behave in that sense pretty soon.
Repeating a question we made when we talked about Dyson, what will happen when everyone sells EVs and carbon credits are no longer needed? When that happens, the business misdirection they seemingly provoke will disappear.
What will Tesla have to keep afloat, apart from its cars? Will the Tesla Battery Day make them cheaper to manufacture? Will people still want to buy if it does not correct their issues? Hopefully, Tesla is asking the same questions. It would better have all the answers.