President Donald Trump is set to sign a new bill into law, effectively eliminating a crucial revenue stream for Elon Musk’s EV giant, Tesla Inc. The bill eliminates the $7,500 Federal EV credit on new purchases, as well as a $4,000 credit on used EVs, and also axes hefty fines on the CAFE (Corporate Average Fuel Economy) norms.
CAFE and ZEV Credits
CAFE norms regulate fuel economy for vehicles, and Tesla generates vast amounts of regulatory credits, known as ZEV (Zero Emission Vehicle) credits, by manufacturing all-electric vehicles. These credits can be sold to other auto manufacturers that have exceeded CAFE norms, helping them offset fuel economy standards and avoid paying hefty fines to the government. In 2024, Tesla generated $2.76 billion in revenue through these credits.
Revoking EPA Waivers
The bill also revokes EPA (Environmental Protection Agency) waivers that allowed California, and other states that follow its lead, to enforce stricter emissions rules, including ZEV mandates. This means that states can no longer require automakers to meet ZEV sales targets or buy ZEV credits, rendering the sales of ZEV credits non-essential for companies in the US. However, Tesla can still use ZEV credits as a revenue stream outside of the US.
Impact on Tesla
Tesla’s sales have been down in recent times, with double-digit declines in markets like Sweden and Denmark. However, with Q2 deliveries exceeding market expectations, and sales in China and the UK rising, there could be a silver lining for the company. Tesla has also confirmed that it will introduce affordable models in its lineup, which could help stabilize revenue streams in the absence of ZEV credits.
A New Era for Tesla
With Elon Musk assuming oversight of sales in the US and Europe, and the introduction of new models, Tesla may be able to navigate the loss of ZEV credits. The company offers satisfactory momentum, while scoring well on growth and quality metrics, but the stock offers poor value.
Key Takeaways
- Trump’s tax bill eliminates the $7,500 Federal EV credit and $4,000 credit on used EVs
- The bill axes hefty fines on CAFE norms and revokes EPA waivers
- Tesla generated $2.76 billion in revenue through ZEV credits in 2024
- The company can still use ZEV credits as a revenue stream outside of the US
- Tesla’s sales have been down, but Q2 deliveries exceeded market expectations, and sales in China and the UK are rising
What’s Next for Tesla?
As the company navigates the loss of ZEV credits, it will be important to watch for updates on new models, sales performance, and Elon Musk’s leadership. With the introduction of affordable models and Musk’s oversight of sales, Tesla may be able to stabilize revenue streams and regain momentum in the market.