Tesla Earns Money Selling Pollution Credits, Loses Money Selling Cars

Electric-vehicle manufacturer Tesla, seller of the expensive but well-regarded Model S sedan (and formerly seller of the Tesla Roadster), is still in its startup phase.  Revenue is climbing sharply, but it’s not cheap to launch a new automobile brand and develop new cars, and that is showing in Tesla’s bottom line net income numbers.  But, as the Wall Street Journal points out, one statement stood out in Tesla’s recent 10K filing raised a few eyebrows because of how much money Tesla made selling pollution credits to other manufacturers.

We have entered into contracts for the sale of ZEV and GHG credits with several automotive manufacturers. For the years ended December 31, 2012, 2011 and 2010, we earned revenue from the sale of ZEV and GHG credits of $40.5 million, $2.7 million and $2.8 million, respectively. Our current agreements provide for the sale of a portion of the total ZEV credits that we will earn from the sale of vehicles that we plan to manufacture in 2013. Our current agreements also provide for sale of substantially all of the GHG credits we will earn from the sale of vehicles that we manufacture in 2013 and 2014.

First, a bit of background.

Because all that Tesla sells are “zero emission” EVs, they don’t need any kind of offset for polluting vehicles elsewhere in the lineup.  But Tesla still earns credits from states such as Arizona, California, Connecticut, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Rhode Island and Vermont when a customer in those states buys a Tesla electric vehicle.  Tesla can then sell those ZEV (zero emission vehicle) and GHG (greenhouse gas) credits to other automakers so that those automakers who do not meet zero-emission and greenhouse-gas standards can offset their shortfall with credits rather than having their sales limited by regulatory action.

By 2025 (12 years from now), up to 15.4% of each large volume manufacturers’ fleet must be made of zero emission vehicles in California and the states above that adhere to California’s emission standards instead of the federal standards.  The penalty for noncompliance will be harsh: they won’t be able to sell vehicles in those states, or at the very least, they will be required to artificially limit their sales of “polluting” vehicles so that “zero emission” vehicles comprise at least 15.4% of the fleet.  They can get to 15.4% by changing the numerator, the denominator, or both.

It’s also worth noting that the Alliance of Automobile Manufacturers (representing U.S.-based automakers) and the Association of Global Automakers (representing foreign-based automakers) have petitioned the EPA to roll back California’s 15.4% mandate.  Their argument is that while it may be technically possible (albeit expensive) to produce that quantity of EVs, it’s no guarantee that consumers will buy them, particularly given the glacial pace of EV adoption over the past few years.  About one-tenth of one percent of the 14.5 million new cars sold last year in the U.S. were EVs, so there’s a long way to go before California’s 2025 dream becomes a reality.

How important are ZEV/GHG credits to Tesla’s bottom line?
What’s funny about the Tesla situation is that the company earned so much money from selling pollution credits, but lost so much money doing basically everything else that it has to do in order to operate.  It’s also important to note that Tesla sold far more of these credits during 2012 than it did in past years, as noted in the sentence from Tesla’s 10K ($2.8 million in 2010, $2.7 million in 2011, then leaping to $40.5 million in 2012).  The credits are becoming a large part of Tesla’s revenue, and likely a critical cog in the company’s business model.

Tesla’s revenue increased by 102.3 percent from 2011 to 2012 (from $204,242,000 to $413,256,000), but its net loss widened by 55 percent, ballooning from $254,411,000 to $396,213,000.

Just think about what those results would look like without $40.5 million in revenue from pollution credits.  While they’re surely not 100% profit, they are likely close to it.

Warning:  assumptions ahead!
For argument’s sake, let’s assume that they are (I’m a writer, not an accountant, and certainly not an auditor – so it’s my prerogative!)  Revenue for 2012 would have been about $372 million (down from $413 million) and the loss would have increased to $436 million (up from $396 million).

Who says cap-and-trade would kill the economy?  A miniature version of it sure is helping Tesla.

How much does Tesla get for each pollution credit?
Another interesting aspect of this, and one for which we have almost no data, is figuring out how much each Model S’s pollution credit is worth.  Though Tesla refuses to provide monthly sales figures (unlike nearly every other automaker, save privately-held EV laggards such as Coda Automotive and Fisker Automotive), they are a public company and have to provide periodic data to investors.  In this case, their 10K shows (on page 6) that the company produced 3,100 Model S vehicles and delivered approximately 2,650.  The 2011 10K shows that the Tesla Roadster’s production run comprised cars (from 2008 to 2012.)

Warning: more assumptions coming.  Assuming that all of the 2,500 Roadsters have now been sold, that’s a total of roughly 5,150 Tesla vehicles sold during the company’s history through the end of 2012.  We also know that Tesla has recorded ZEV credit revenue of $40.5 million (2012), $2.7 million (2011), $2.8 million (2010), $8.2 million (2009), and $3.5 million (2008).  Total ZEV credit revenue for the past five years (which encompasses all of Tesla’s production history, beginning with the 2008 Roadster) was $57.7 million.  Divide $57.7 million by 5,150 vehicles, and it’s $11,203 per vehicle sold.

The lesson here?  Not only is the government subsidizing EV purchases at $7,500 a pop, but Tesla’s competitors are subsidizing it for $11,000 per car.  And yet Tesla still can’t make money.  (To be fair, the company expects to be profitable in Q1 2013, but 2012 – the Model S’s launch year and the year in which production ramped up – was not close to profitable).

Meanwhile, Tesla sure has a nice little thing going with the sale of ZEV credits to other automakers.  What we don’t know is who those automakers might be.