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Carbon Credits and TESLA

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Carbon Credits and TESLA

What's the big deal with TESLA?


TESLA is currently the biggest name in the automotive sector and by market value is the most valuable car company in existence exceeding $800B dollars in Jan 2021. Just to compare market value with the five largest automotive producers by production volume: 

  • Toyota (£213B)
  • Volkswagen ($98B)
  • General Motors ($77B)
  • Ford ($41B)
  • Hyundai ($44B)

TESLA was valued at more than the top 5 combined. It is also worth noting what the TESLA market value was at the start of 2020…. Just one year earlier in Jan 2020 TESLA was valued at $120B, highlighting more than a 500% increase in less than a year. 

There are a lot of factors involved in this sky high valuation including the celebrity status of Elon Musk, the head start of TESLA in the field of automotive electrification and battery technology, their driverless car technology and a boost to retail investment driven by the pandemic / government stimulus. It is also important to reflect on the company’s financial performance as by almost all accounts it does not justify a stock value greater than the top 5 automotive car producers. 

The first thing to note is that TESLA had not made an annual profit until 2020. The fact that TESLA has managed to generate its first profit since incorporation is great news for the company and has probably had a very large part to play in its share price growth in the same year. To compare this with some of the 2020 profits of the large automotive manufacturers:

  • Toyota (£15B)
  • Volkswagen ($12B)
  • General Motors ($6B)
  • Ford (-$1B)
  • Hyundai ($2B)

TESLA’s net profit for the year 2020 was $690M. Significantly lower than the profits of the other automotive manufacturers (other than Ford). This performance in market value sends a signal to the rest of the automotive industry that there is value in the development and production of electric vehicles. 


What do carbon credits and TESLA have in common?

Carbon credits are intangible, tradable assets that represent 1 tonne of CO2e removed (or prevented when it otherwise would have ended up in the atmosphere) from the atmosphere. Organizations can produce carbon credits when they can prove that their operations can remove / prevent 1 CO2e from the earth’s atmosphere following a complex calculation and audited process. These credits can then be traded with organizations that emit CO2e so they can reduce their net emissions either by law where these laws exist or voluntarily. This is achieved by buying and then retiring (deleting the carbon credit from existence so it can’t be used again) these carbon credits e.g. if your business emitted 1000 tonnes of CO2e in a year you could purchase 1000 carbon credits and retire them to become carbon neutral.

Because TESLA’s are all zero emission vehicles they technically stop emissions entering the atmosphere vs the average internal combustion engine vehicle and therefore TESLA can produce and sell carbon credits to other automakers in the US that have to abide by various environmental emissions programmes within the US. These programmes are designed to incentivize the move to net zero emissions within the auto industry and require automakers to purchase and retire automotive carbon credits if their vehicles cause emissions over a certain threshold. The result of this is that the majority of automakers have to spend large amounts of cash in buying these credits whereas automakers focused primarily on producing low / zero emissions vehicles can make large amounts of cash by selling these credits. 

Would TESLA have made a profit without carbon credits?

Let’s have a quick look at TESLAs first year of profit in 2020. TESLA’s net profit was $690M. How much of that profit was from the production and sale of carbon credits? The answer is $1.6B. This means that without the sale of carbon credits TESLA would likely have made a $1B loss. If we look back at the previous financial performance of TESLA, the losses would have been significantly greater were it not for the production and sale of carbon credits. When we start to look at the recent $650B increase in market value of TESLA it seems rather unlikely that investors would have swarmed to the car maker to such an extent without its ability to sell carbon credits and provide an optimistic plan for growth and profitability.

Some would argue that without the ability to produce and sell carbon credits TESLA would not have been commercially viable in the early 2000’s and the investors that swooped in a the last second to provide necessary funds to keep TESLA afloat would not have been so keen. It’s impossible to know if TESLA would have made it this far without carbon credits but there is a very strong argument that it wouldn’t be here today in its current form without them.

The power of carbon credits?

The story so far, is that TESLA may not be the business it is today without the ability to produce and sell carbon credits. On the surface this would mean that TESLA’s investors wouldn’t be swimming in pools of cash and Elon Musk would not be one of the richest men in the world. If we dig a little deeper the impact that TESLA has had on the world is much more significant than this. 

In 2020 global emissions from transport exceeded 8 billion tonnes CO2e of which over 6 billion tonnes came from road based transport e.g. trucks and cars. This accounts for approximately 20% of all global emissions. Approximately 75% of emissions from this sector is from the direct burning of fuel for power resulting in 4.5 billion tonnes of CO2e emitted globally per year through fuel burnt to power cars that would be completely eradicated by a move to zero emission vehicles.  

It is impossible to tell how the automotive market would look today without the existence of TESLA but there is a strong argument that the move to electrification would be much slower due to the uncertainty in return on investment, perhaps in the region of 1 to 5 years. If we look at a scenario where TESLA accelerated the global movement to electrification by 1 year we can calculate a saving of 4.5 billion tonnes of CO2e saved from entering the atmosphere, if we calculate the scenario at 5 years there would be a saving of 22.5 billion tonnes of CO2e, approximately 3 tonnes for every person on the planet which is truly staggering.

Carbon credits have undoubtedly played a key part in this progress. Carbon credits don’t just have value through the direct removal of CO2e from the atmosphere, their primary value is providing the financial incentive for positive change. TESLA is a perfect example of this.

 

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