Changes to California ZEV rules could threaten Tesla income

Tesla Logo - Supercharger

As is the case with most government regulations, the California Air Resources Board’s Zero-Emission Vehicle rules are complex, and changing them tends to create winners and losers (and acronyms).

CARB regulators are now considering changes to the rules that would make it harder for automakers to comply with ZEV targets by buying credits, rather than building their own zero-emission cars, according to Bloomberg (via Green Car Reports).

California’s ZEV rules theoretically require automakers to sell zero-emission vehicles (EVs or fuel cell cars) in proportion to their overall sales. Some manufacturers build “compliance cars” to satisfy the mandate, others buy credits from automakers that have a surplus, and some do both.

As the only company that sells only EVs, Tesla has always had a surplus of credits, and selling them has provided a nice little source of side income ($168.7 million from ZEV and other regulatory credits in 2015). While the legacy automakers continually lobby to water down the ZEV regulations, Tesla has been a reliable proponent of leaving them as they are (although the company wisely treats this bounty as a temporary windfall, always separating it from operating income in financial statements).

As EV sales grow, CARB regulators now fear that there are too many credits available. The agency previously predicted that ZEVs would reach a market share of 15 percent by 2025 (another view: the World Energy Council believes that global market share will need to be 16% by 2020 to meet already-agreed-upon fuel economy standards).

But because so many ZEV credits have been issued, automakers may now be able to comply with regulations even if ZEVs make up as as little as 6 percent of their fleets. To get the figures back on track, the state may increase its ZEV requirement, said CARB member Dan Sperling. “The inclination here is to make the mandate tougher,’’ he said. The board could do that by raising the number of credits and sales automakers need to comply, and/or limiting the credits that any individual automaker can sell.

The proposed changes are drawing criticism both from automakers that are selling ZEVs and from those who have chosen not to.

“It’s a feature of the regulation that you’re required to produce fewer cars if you invest more in technology,” said Honda AVP Robert Bienenfeld. “It’s bizarre to say we need to make the regulation more stringent because it’s working.”

Diarmuid O’Connell, Tesla’s VP for Business Development, said he supports higher emission targets, but rejects the idea of capping credit trades, which he calls “an extremely stupid idea: You’d be punishing people who are doing the most to put EVs on the road.”

Federal and California regulators will soon begin midterm reviews of their emissions regulations (for a detailed look at those regs and how they came to be, read the recent book Driving the Future). California is to issue an evaluation in the fourth quarter of 2016.

“The industry asked for the midterm so we can lower the standard if necessary,’’ said CARB Chairman Mary Nichols. “We said ‘Fine, as long as there is also the possibility it can go higher.’”


Source: Bloomberg via Green Car Reports

  • Zephyr

    Interestingly, this could actually do more to help bring about the goal that is Tesla Motors’ raison d’etre. Tesla doesn’t want to take over the entire market with its EVs, they want ALL the automakers to make the transition. So, while this could hinder their own *direct* efforts to proliferate EVs, forcing other OEMs to stop buying their way out of compliance, and instead to actually develop EVs, could direct far greater resources toward their aims.

    • nordlyst

      It’s Tesla’s *stated* goal, yes. Grown ups should not immediately believe everything, especially when it comes to publicly owned corporations claims about their do-good motivation. Recall how another CA entity used to be equally natively viewed? Yes, I’m talking about “don’t be evil” Google..!

      I’m not in any doubt Tesla has been a force for good and will probably remain so for a long time still. But I have zero illusions of what choices will be made if and when the company’s interest collides with society’s. How could it be any different?? In the end, the investors want a return. Some day that means making a profit, not merely inflating the stock by ever bigger promises of future profits… and that’s when we will begin to see if Tesla is truly any different, morally speaking, to every other psychopathic corporation.

      • Electric Bill

        Nordlyst: I don’t agree with your conclusion. Musk has been very altruistic in how he runs the company, most perfectly illustrated by his decision to open all of the Tesla patents to use by other companies in their efforts to electrify the models they offer. He, puts his money where his, mouth is more than any multi-billionaire ever… he is the exception that proves the rule: power corrupts— absolute power corrupts absolutely.

        • nordlyst

          I’m sorry, but I don’t believe it. Musk may be an idealist, but the reason investors put up with things that negatively affect the bottom line (at least in the short term) is that Teslas stock price (which is what matters to an investor) bears zero relation to its bottom line.

          Do you seriously believe that Tesla investors are altruists who don’t care how their investment fares? If they are, they should have handed over their money instead. After all, buying a stock – once the IPO is out of the way – doesn’t actually contribute a single cent to the company’s funds.

          If I buy a share and then sell it to you, neither of us has done anything to enable Tesla to do anything, but I would have made a profit or loss from the price change while I held the share.

          People speak as if they are all buying their shares straight from Tesla as some sort of interest-free loan! I – who actually have lent money to Tesla at zero interest in the form of a Model 3 reservation – think it would be fairly inflated if I were to consider my act one of altruism.

          But that’s all ok. We don’t need altruism to save ourselves. We need sustainable ways. Like I said, Tesla is contributing in a very important way to this. I just think it is childishly naive to disregard the profit motive. Besides, nothing would be better than if the profit motive worked to make us live more sustainably – there are after all not that many altruists out there. Even the median-income person in the West is in the global top 5% income group, yet almost none of us divulge as much as 0.5% of our income on charity. I think this proves beyond all reasonable doubt that we are actually quite selfish, and quite able to tolerate gross injustice – even though we don’t like to think of ourselves this way.

          • Electric Bill

            Be the pessimist if you care… it is absurd to assume Musk is the only altruist on the planet, and he has likely attracted those that are. I could comment further to make my point but you are obviously stuck in your position and I certainly am, not willing to believe the worst in people just for you. I won’t waste any more of my time responding to your comments on this thread.

          • nordlyst

            Realist, not pessimist. And I never assumed Musk to be the only altruist on the planet. Assuming that he has attracted them all however perfectly proves my point – there’s a lot of wishful thinking and not much willingness to look realistically at Tesla!