Tesla’s carbon credit windfall to shrink as rival car-makers clean up their act

Tesla will miss out on more than $US200 million in revenue this year after European car giant Stellantis revealed it would need far fewer credits to meet the European Union tight emissions regulations than it initially thought.

While the hit may not be great news for Tesla shareholders, more broadly it is a positive sign the newly-formed European auto maker, a merger between Fiat Chrysler and the French-based PSA Group, is edging towards lower emissions. It also suggests the EU’s efforts to push car manufacturers towards low-emission vehicles is working.

Emissions credits, known as “regulatory credits”, have become big business for Tesla as regulatory measures to limit car emissions in Europe and in some US states boost demand for credits.

Last quarter alone Tesla sold more than $US500 million worth of credits, meaning they accounted for more than 5 per cent of total revenue of $US9 billion. In recent months that has made the difference between a net profit and a net loss for the company, though it has also become a smaller and smaller percentage of total revenue as its own car sales soar.

Stellantis’ plan to buy the credits was made before this year’s merger, by the Fiat-Chrysler part of the company. It needed the credits to ensure it avoided hefty fines from the European Union for breaching carbon emission limits.

But the merger with the lower emissions PSA, manufacturer of Peugeot, brought the whole company’s total emissions per car down, meaning it will only need about a third of the anticipated credits from Tesla.

The Financial Times reports this will cost Tesla around €200 million ($US240 million) for the year, assuming it can’t find another customer for the credits. That’s about 13 per cent of the revenue Tesla received from regulatory credits last year.

In that context it’s hardly a huge hit, and Tesla’s share price showed little or no change as a result. In fact, far from being bad news, for EV enthusiasts and those concerned about climate change, it seemed to show the EU’s efforts to push car makers towards low and zero emissions vehicles is working.

Under EU rules in place from this year, new car fleets can emit no more than 95 grams of CO2 per kilometre per car, on average. There are, however, ways car makers can offset this if they fail to meet the standard.

One way is by increasing their fleet of “low emission” vehicles – mostly hybrid or full battery EVs with emissions of less than 50 grams of CO2 per kilometres – which gives them “super credits” to offset the average emissions of traditional internal combustion engine cars. The idea is that this incentivises car makers to invest in EV technology.

The other is simply to buy credits from other car makers such as Tesla.

Similar schemes exist in some US states including California. Since Tesla only builds zero emissions vehicles, it can sell all of the credits it generates to higher polluting car makers.

While Europe has had great success in pushing its emissions down – at least compared to other countries and jurisdictions – the EU’s transport emissions have proved among the most difficult to reduce, and are currently about 20 per cent above 1990 levels.

Fiat-Crysler’s merger with PSA appears to have significanlty reduced the company’s emission to the point that it doesn’t need the Tesla credits anymore.

Since the $US52 billion merger, Stallantis has ramped up its plans to go electric, aiming to triple its sale of electric vehicls this year, and have electric or hybrid versions of all its cars by 2025.

Following the merger, Stellantis is now the fourth largest car maker in the world. Its brands include Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS, Fiat, Fiat Professional, Jeep, Lancia, Maserati, Mopar, Opel, Peugeot, Ram and Vauxhal.