Tesla’s ZEV credits may become hot commodity

Tesla is sitting on a hoard of environmental credits that rival automakers may covet if they can’t adjust quickly to the new rules dictating which electric vehicles are eligible for the $7,500 federal tax credit.

The Inflation Reduction Act passed in August requires automakers to assemble EVs and plug-in hybrids in North America to qualify for tax credit eligibility.

Beginning in January, the law also will require many to set up new battery and manufacturing supply chains in North America or a handful of approved free trade countries for their zero-emission vehicles to qualify for the tax credit incentive. The restrictions become increasingly stringent over the next decade.

In the near term, automakers such as Hyundai and Kia won’t have vehicles that qualify for the tax credit, which partially offsets the higher price of electric cars and encourages sales.

That’s expected to change over several years as the automakers reorganize their operations to meet the requirements for the credit.

But automakers still need to collect zero-emission-vehicle credits in California and other so-called ZEV states that have adopted some of California’s regulations.

It is a complex system where automakers get from partial to multiple credits based on a zero-emission vehicle’s range toward requirements based on their overall sales volume. Companies can stockpile surplus credits, but if they don’t sell enough ZEVs they must buy credits from rivals.However, those rules will change in 2026, just as the eligibility for the federal tax credit takes a jump in stringency. Each full-battery or fuel cell electric vehicle with minimum 150-mile battery range will receive only one credit starting then. And credits will have a five-year time limit. Those earned now don’t expire.

Tesla has earned billions of dollars from selling zero-emission vehicle credits to automakers that didn’t satisfy minimum EV sales requirements in California and 14 other ZEV states. Together, those states account for almost 40 percent of U.S. new-vehicle sales and about two-thirds of EV sales.

Because it sells only electric vehicles, Tesla has become the primary source of credits when other automakers fail to meet ZEV sales requirements or start stockpiling credits to protect themselves against anticipated future non-compliance.

In California, where Tesla earns the most credits, it logged a stockpile of nearly 752,445 credits at the end of 2020, the most recent year for which the ZEV states have reported automaker balances. The next biggest balances belonged to Toyota, 187,045, and General Motors, 184,207.

Tesla’s environmental credit balance ballooned as its vehicle sales grew in recent years. It has collected an estimated 2 million credits from the start of 2021 to June 30 of this year.

The company booked $2.1 billion in revenue from credit sales in 2021 and the first quarter of 2022. While there’s no public reporting of the value of a ZEV credit, which changes with demand, it appears Tesla averaged about $3,500 each.