Tesla Beating California's Regulation
Mary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2011 approximately 18,000 electric vehicles were sold in the U.S. This number is up from just under 500 in 2010. With fuel costs continually rising and declining, then rising some more, more consumers are seeing the long-term value in electric cars. And though sales of these vehicles are picking up the numbers are still a far cry from what policy makers in heavily regulated states such as California are requiring. Honda (NYSE: HMC) sold fewer of its FCX Clarity sedans than it anticipated, leaving it far from reaching the targeted number. And this is from a company whose lineup ranks among the most fuel-efficient in the U.S.
Alongside the electric vehicle trend a new opportunity is emerging for carmakers. They are selling credits required to meet clean air rules. This year California is stepping up the number of zero-emission vehicles that automakers must sell in the state. For those companies that don’t meet their quotas, they can simply buy credits from rivals that exceed these targets. Honda, for example, bought credits from Tesla (NASDAQ: TSLA) from 2008 to 2010.
The number of credits per vehicle depends on its range and how fast it recharges. A model with a 100-mile range and standard charging, such as Nissan’s Leaf or Ford’s (NYSE: F) electric Focus, would generate 3 credits. A long-range, fast-charging Tesla Model S is worth 7 credits. These credits are reportedly being sold for anywhere from $5,000 to $10,000 each. That can turn into a hefty additional profit for automakers who are successful in selling electric vehicles.
Leave it to the automotive industry to sidestep regulation and turn a simple requirement into a back door trade. The requirements for 2012−2014 state that for any automaker with annual sales of at least 60,000, 2% of those units sold must be zero-emission vehicles. California regulators think that there will be growing demand for these vehicles and these requirements just ensure that they are available to the general population.
Automakers, however, are having a hard time meeting these requirements. The difficulty of this requirement is leaving some to question whether drivers actually want zero-emission vehicles. Toyota (NYSE: TM) is finding this to be a difficult task. Toyota currently holds the largest market share in California, meaning that it has to sell more zero-emission vehicles than most of its competitors. Thankfully, companies with credits are eager to sell them.
Toyota, Nissan, and Ford will be expecting a difficult task ahead as the zero-emission requirements in California increase over the next decade. The question is whether they will take more time developing trading relationships with Tesla or working on their own vehicle lineup. Tesla, however, will have the easiest time with this task. Tesla specializes in electric vehicles, foregoing the traditional gas guzzling lineup. The company should not have any difficulty keeping up with California’s requirements. They might even be able to profit from those cannot keep up. It appears that California’s requirements are a winning combination for Tesla.
MaryPosey has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and Tesla Motors. Motley Fool newsletter services recommend Ford and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.