What 'regulatory credits' are — and why they're so important to Tesla

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Tesla CEO Elon Musk speaks at a delivery ceremony for Tesla China-made Model 3 in Shanghai, east China, Jan. 7, 2020.

Ding Ting | Xinhua News Agency | Getty Images

Tesla’s reliance on so-called regulatory credits to make money has been thrust back into the spotlight after a regulatory filing revealed investor Michael Burry took a $534 million bet against the electric carmaker.

Burry, who was depicted in Michael Lewis’ book “The Big Short,” has a short position on the company — betting that Tesla shares will fall.

In a now-deleted tweet, the famous hedge fund manager said Tesla’s reliance on regulatory credits to generate profits is a red flag.

Tesla raked in $518 million in revenue from sales of regulatory credits in the first quarter of the year, helping the U.S. electric vehicle maker post another quarter of profit.

What are regulatory credits? How do they work?

In a push to reduce carbon emissions, governments around the world have introduced incentives for automakers to develop electric vehicles or very low-carbon emitting cars. Credits are given to carmakers that build and sell environmentally friendly vehicles.

In the U.S., California and at least 13 other states have rules surrounding regulatory credits. They require auto manufacturers to produce a certain number of so-called zero-emission vehicles (ZEVs) based on the total number of cars sold in that particular state.

Automakers that produce such cars will get a certain amount of credits based on factors like the range of the vehicle — longer range ZEVs get more credits.

These carmakers are required to have a certain amount of regulatory credits each year. If they can’t meet the target, they can buy them from other companies that have excess credits.

Because Tesla only sells electric cars which come under the ZEV category, the company always has excess regulatory credits and can effectively sell them at a 100% profit.

Regulatory credits in China and Europe

Tesla’s regulatory credit business model

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