Trump Wants to Kill Policy That Made Tesla Profitable Last Quarter

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It’s no secret that Tesla sales were down considerably last quarter, and net income was down a whopping 71% year over year. What is less known is that Tesla wouldn’t have even been profitable if it wasn’t for policies Donald Trump doesn’t like and wants to kill. Though, there is a somewhat nebulous footnote or four here.

First of all, the facts: Tesla made a $409 million profit last quarter. It would not have made a profit, though, if it hadn’t sold $595 million worth of regulatory credits. Those regulatory credits are sold to other automakers that have not met certain requirements with regard to average “fuel economy” of their fleet or average CO2 emissions of their fleet. Tesla doesn’t have to do anything notable to make those sales — it has excess credits because it’s a 100% electric vehicle company.

Donald Trump is opposed to all climate action, and isn’t even allowing federal workers to create a National Climate Assessment, something essentially every country in the world has committed to do. He is doing everything he can to harm climate solutions, and particularly policies that specifically support climate solutions (like electric vehicles). So, it should not surprise you to find out that he thinks there should be no policies requiring automakers to achieve strong fuel economy standards or fleet CO2 standards that essentially require that they sell electric vehicles.

Let’s get to the four footnotes or nuances now.

First of all, the big source of regulatory credit income for Tesla in the USA is in California. California has stronger fuel efficiency requirements than the USA as a whole, and it was granted to option to have stronger requirements under the Clean Air Act. In fact, this right was written into the Clean Air Act specifically so that California could deal with its air pollution problems as it wished and was doing with stronger requirements. Wikipedia writes: “With one exception, the responsibility for regulating emissions from new motor vehicles under the Clean Air Act rests with the EPA. Section 209(a) of the Act states in part: ‘No state or any political subdivision thereof shall adopt or attempt to enforce any standard relating to the control of emissions from new motor vehicles or new motor vehicle engines subject to this part.’^[41] Section 209(b) of the Act provides for the exception; it grants the EPA the authority to waive this prohibition for any state that had adopted emissions standards for new motor vehicles or engines prior to March 30, 1966.^[42] California is the only state that meets this eligibility requirement and is thus the only state in the nation, which can seek to obtain a waiver from the EPA. In order to obtain a waiver and establish its own emissions requirements, the State must demonstrate, among other things, that its standards will be at least as protective as public health as any applicable federal standards. Once California obtains a waiver for a particular standard, other states may generally adopt that standard as their own.” Donald Trump wants to rescind this waiver, and he tried to do so during his first term as president. As far as I’m aware, no other US president or presidential candidate even proposed doing such an absurd thing. Nonetheless, it is expected Trump will amp up this fight and try again to rescind the waiver.

California’s stronger fuel efficiency standards are a critical reason why California sells a lot more EVs than the rest of the country. I remember research more than a decade ago out of Simon Fraser University that found that there would not be a rapid and adequate transition to EVs with supportive (carrot) subsidies alone, subsidies incentivizing that consumers buy EVs. Rather, critical to an adequate EV adoption rate were policies that required automakers to sell EVs, through fuel efficiency standards, for example. The key reason is that automakers simply won’t produce and sell enough EVs if not forced to. As we’ve seen now, that’s been the case. Where and when automakers are forced to sell more EVs, believe it or not, most of them can find buyers for their EVs! Where and when they are not forced to sell more EVs (or pay fines), there is much lower EV market share — buyers get what they get. However, there are some laggards who do not meet requirements and decide to go a 3rd route down an alley — instead of selling more EVs or paying fines, they use the loophole of buying credits from automakers who sell more EVs than they need to sell. Naturally, Tesla has been an easy go-to sellers of these credits in California for more than a decade.

So, if Trump did kill California’s waiver somehow, automakers wouldn’t have to sell as many EVs there (or in states that have joined California’s requirements) and the laggards would no longer have to buy regulatory credits from Tesla. The good news is that it seems unlikely Trump can win in this case. But … a lot that is unlikely has already happened, so we’ll see.

On to footnote/caveat number two, though. We don’t actually know how much of Tesla’s regulatory credit revenue is from the US. The European Union also has strong emissions standards, and Tesla is scooping up regulatory credits from laggard automakers there as well. Would Tesla still have made a profit in the 1st quarter if it was only selling regulatory credits outside of the USA? We don’t know, but I’d say it’s very unlikely.

How about a third footnote? While Tesla is reported to be making a big chunk of money on regulatory credits in Europe, word on the street is that some policymakers are not enthusiastic about supporting an American company like this any longer in the face of Elon Musk’s offensive meddling in European politics and Trump’s tariff war. There’s been talk of changing the system there to make it where Tesla can no longer benefit like this. We’ll see where that goes, though. I’m skeptical anything will change. At the same time, the domestic auto companies in Europe have a lot of influence and I imagine some of them would love to see Tesla’s position weakened.

A fourth and final footnote is that competition is growing. Other automakers are selling more and more electric vehicles, offering more and more compelling EV models, taking more and more share of the EV market from Tesla in the US and globally, and also gaining access to Tesla’s Supercharger network in the US. It may be that there’s naturally much less demand for reg credits in the coming years anyway. However, we’re clearly not there yet, considering that Tesla made $595 million on such credits in the 1st quarter.

So, we’ll see where all of this goes. However, as with tariffs; IRA subsidies for EV production, EV battery production, EV battery cell production, and battery mineral mining and processing; EV charging infrastructure spending; federal government EV mandates; and various solar policies; the Donald Trump administration is again opposed to policies that help Tesla. One would hope that Elon Musk becoming buddy buddy with Trump would have changed that, but you’d have to really be a bit detached from Republican politics to believe Trump would stop attacking clean technologies and stop supporting his buddies in the fossil fuel industry.