Tesla will earn 1 billion by selling CO2 'credits' to rivals

EU fines for manufacturers that exceed CO2 limits are a huge source of income for Tesla

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By: Filippo Einaudi

Jan 14, 2025 at 4:10am ET

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Europe's stringent emissions regulations are putting pressure on car manufacturers, forcing them to pay big money to their main rival in the electric car market: Tesla. Elon Musk's offset credit business is becoming a major source of revenue.

European regulations require manufacturers to drastically reduce the average emissions of their vehicles (as of this year, the average value has been reduced to 93.6 gCO2/km) or face huge fines. To get around these penalties, major brands such as Ford, Toyota and even Stellantis, which have relatively few electric cars in their range or are simply struggling to sell them, are resorting to 'pooling' with Tesla, the leader in electric vehicles.

This system makes it possible to buy carbon credits from Tesla to offset excess emissions: an operation that, according to UBS analysts, could bring the company an estimated profit of USD 1 billion in 2025.

A profitable business

Tesla has so far built a small fortune by selling these credits to other manufacturers. In the third quarter of 2024 alone, this business has already generated revenue of $739 million, and since the business started, earnings have reportedly already exceeded $9 billion. And while many predicted a decline in this revenue as competitors expand EV production, sluggish demand for EVs has kept Tesla in a dominant position.

Car CO2 emissions and homologation tests

According to analyses, European manufacturers need at least 20 per cent of their fleets to be electric vehicles in order to meet average values. However, reduced incentives in key markets have dampened consumer interest, putting many companies in difficulty. In order to avoid fines of up to hundreds of millions of dollars, pooling with Tesla has become a must.

But how long will it last?

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Although the circumstances seem more than favourable, the future of this market may soon be called into question. In the United States, in fact, Donald Trump's new administration has announced plans to relax regulations on emissions and incentives for electric vehicles, thus giving some breathing space to the 'oil' vehicle market and the supply chain. A move that could cost Tesla up to $3.2 billion in credits and subsidies.

Even in Europe, however, the strict rules are being criticised, even though the EU has always been inflexible on choices, because manufacturers argue that the timeframe is too tight compared to economic uncertainties and consumer reluctance to adopt electric vehicles. Moreover, competition in the credit market could increase, with brands such as Volvo and Polestar already having a predominantly electric or near-electric range and already committing to their own emission pools.