A Republican-led push in the US Congress threatens to blow a hole in one of Tesla’s most lucrative sources of profit: the sale of carbon and fuel economy credits. If the bill gets approved, it would deprive the electric vehicle maker of billions in future revenue. No wonder Tesla CEO Elon Musk slashed the proposal, aggravating his feud with the President.
At the heart of the controversy is a provision in Donald Trump’s so-called ‘Big Beautiful Bill,’ which is essentially a budget package that Senate Republicans are fast-tracking through Congress. Among its many measures (ranging from tax cuts to the dismantling of environmental protections) is a crucial clause that would eliminate penalties for automakers who fail to meet fuel efficiency standards.
End of CAFE credits
For Tesla, this is no minor detail. The company earned $3.36 billion (€3.09 billion) in regulatory credit sales over the past five quarters alone, including $595 million (€547 million) in the first quarter of this year. To put it into perspective, it supersedes its net profit over the same period. So, without that stream of income, the company’s bookkeepers would be writing with red ink.
“This Senate action would effectively end the market for CAFE (Corporate Average Fuel Economy, ed.) credits,” commented Chris Harto, a senior policy analyst at Consumer Reports, in the American press. “It would essentially turn the CAFE standards into nothing more than a reporting requirement with no consequences for automakers.”
The proposal is part of a broader Republican agenda to dismantle the Biden administration’s climate-focused regulations. It is likely to delight Detroit’s Big Three carmakers—Ford, General Motors, and Stellantis—who have long reluctantly absorbed the cost of buying credits to offset emissions from their gasoline-powered fleets.
Why pay Tesla, critics of the standards argue, when you can simply ignore them?
Umbilical cord
Tesla’s dominant position in the regulatory credit market stems from its all-electric fleet. Under existing rules, it earns surplus credits for exceeding emissions standards, which it then sells at high margins to traditional automakers struggling to meet their targets.
In recent years, this system has effectively underwritten Tesla’s balance sheet. It’s a pattern that has persisted and helped to offset the adverse side effects of turning a start-up into a full-fledged carmaker. Essentially, it serves as an umbilical cord, helping the brand achieve its first consecutive quarterly profits roughly ten years ago.
The prospect of losing this financial cushion comes at a bad time for Elon Musk’s company. Sales are stuck in reverse, market share is under pressure from Chinese rivals such as BYD, and Musk himself has become embroiled in a very public rift with Trump, whom he recently excoriated for promoting a “disgusting abomination” of a spending bill.
Turning sour
There is also concern over parallel efforts to unwind other pillars of US climate policy. The bill would phase out the $7,500 consumer EV tax credit and threaten California’s strict zero-emission vehicle program, which has long served as another lucrative source of credits for Tesla.
Analysts have calculated that these combined changes could wipe out more than half of Tesla’s profits in 2025. Stock prices, and Musk’s wealth with it, could implode.
For a company built on the promise of zero-emission transport, the political winds in Washington have rarely looked so hostile. With Musk and Trump ending their bromance in street-fighting fashion on social media, the political adventure of Tesla’s CEO is turning more sour every day now. Is that the reason why Musk is seeking contact with Trump again?
