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.
Analysts see Tesla as the go-to source for automakers needing credits. That could be important as some brands lose access to the federal price subsidy for EV sales. Most may have enough credits banked to survive at least through 2026. But a crunch could come then.
California recently approved a program to increase its minimum zero-emission vehicle requirement to 35 percent of an automaker’s sales in 2026. That’s twice the current annual EV sales share in California. And the requirement increases annually to 100 percent in 2035. Many of the ZEV states could follow suit.
Automakers who can’t produce EVs and PHEVs fast enough to meet California’s requirements could be fined up to $20,000 per vehicle for missing their mandated minimums — unless they can purchase ZEV credits from Tesla and others that have a surplus.
Only 21 electric and plug-in hybrid models are assembled in North America and will carry the federal tax credit.
None are from Korea’s Hyundai Motor Group, which has become the second-biggest seller of EVs in the U.S. this year because of its popular Hyundai Ioniq 5 and Kia EV6.
Those models look to have the biggest sales risk, said Sam Abuelsamid, principal research analyst for Guidehouse Insights.
“They’ll be competing against EVs and PHEVs made in North America and still eligible for the federal tax credit, and that could cost them some customers,” he said.
The decline could push them below their ZEV credits requirements as they reorganize battery supply and vehicle assembly over the next several years, Abuelsamid said.
The number of eligible EVs will shrink again next year when the federal tax credit program caps prices at $55,000 for sedans and $80,000 for trucks, vans and SUVS and the country-of-origin requirements for battery minerals and other components take effect.
Most major car makers that don’t have EV and battery production facilities in North America are scrambling to build them. Toyota, for example, recently announced a $2.5 billion battery plant for North Carolina and almost $400 million in expansion plans for its existing U.S. auto manufacturing plants. Hyundai is building a factory in Georgia that will open in 2025.
The recent legislative changes won’t necessarily depress electric vehicle sales because the legislation restores the federal tax credit for Tesla and General Motors models. They lost eligibility under the old rules after hitting a 200,000 sales cap.
“Their sales could grow and make up for the sales others might lose,” said David Reichmuth, senior engineer for the Clean Transportation Program of the Union of Concerned Scientists.
In the short term, most automakers will be OK. They have enough credits, earned and purchased, even if they don’t make any more EVs from now through 2025, according to Anna Wong, a ZEV programs specialist with the California Air Resources Board.
A combination of factors influencing the current market for electric vehicles likely assures steady sales regardless of tax credit availability, according to industry analysts.
“Because of the number of vehicles being launched, the low inventories for everything, and growing consumer interest in them, EV sales will continue to grow despite the changed availability for the tax credits,” said Stephanie Brinley, S&P Global’s auto industry analyst for North America.