Trump’s Global Warming Skepticism Could Hurt Tesla Stock
President-elect Donald Trump could reverse the United States’ commitment to the Paris climate agreement (COP21). This would also imply a lifting—or better, scrapping—of the ZEV (zero-emission vehicle) credits. ZEV credits are what has allowed manufacturers to produce electric vehicles; they are government subsidies that make electric cars cheaper to buy.
Tesla Motors Inc (NASDAQ:TSLA) is a master in the art of ZEV. It’s also one of the reasons Tesla stock has often defied the laws of gravity, let alone those of the market.
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Trump promised during his campaign that he no longer wants the U.S. economy to be curbed by environmental issues. He has had the courage to state, albeit in a colorful way, what many would love to shout: “The concept of global warming was created by China to make the US industry less competitive.” But the theory of global warming has mostly helped companies brandishing their environmental commitments, like Tesla. That’s why Tesla stock is at risk now.
Trump has already started to revisit the Paris agreement (COP21) signed on December 12, 2015. COP21 came into force on November 4, 2106. If repealed, one of the first to suffer in the U.S. would be the ZEV credits in California (and in nine other states that have adopted the model in recent months). TSLA stock has benefited from these credits.
ZEV credits have benefited—until now—carmakers in accordance to their engagement in what passes for environmental measures. These companies must have a certain percentage of their production allocated to clean “zero-emission” vehicles. The higher this value, the more the company receives ZEV credits. In other words, Tesla stock is a prime beneficiary of ZEV credits. All its vehicles are—at least as far as their electric motor propulsion—emission-free.
Tesla and ZEV Credits: A Cozy Relationship
If manufacturers do not get enough ZEV credits (by not making and selling enough clean vehicles), they are subject to prosecution. That’s why companies like Fiat Chrysler Automobiles NV (NYSE:FCAU), General Motors Company (NYSE:GM), or Ford Motor Company (NYSE:F) must buy the excess credits from the top-rated companies like Tesla since, if one makes more effort, it compensates for the other’s lack thereof.
Credits: Flickr.com/John Bragg
Many manufacturers sell special electric car models in California to reduce the credits they must pay. Tesla, meanwhile, reaps rewards, adding to its bottom line thanks to ZEV credits. Tesla stock would suffer without them. Tesla may have generated nearly $139.0 million from the sale of these “carbon credits” in the third quarter of its fiscal year. Indeed, it would not be an exaggeration to suggest that Tesla was able to post a profit thanks largely to ZEVs. (Source: “Tesla actually made money last quarter, in part by selling pollution credits,” Autoweek, October 27, 2016.)
If Donald Trump were to eliminate ZEV credits, Tesla stock would be cut off from this important source of income. It would have to compete like everyone else, without legally mandated market “shock absorbers.” Indeed, Tesla stock investors have something to worry about. There are many lobbies fighting against the ZEV credits. Tesla CEO Elon Musk reportedly told investors that ZEVs in California don’t provide much additional revenue.
However, it might be safe to bet that Musk and Tesla investors would prefer that the ZEV credit system expand rather than retract or be scrapped altogether.
