An often overlooked factor that can have a significant impact on a company’s bottom line is the costs or benefits derived from environmental regulations. While Tesla Motors Inc (NASDAQ:TSLA) has been benefiting from its ability to sell “zero-emissions” credit to other automakers, a recent report suggests that the California Air Resources Board is considering changing certain rules that would negatively affect the company’s bottom line.
If this is catching you off guard, it shouldn’t. The practice has been going on since its pre-IPO days in 2009, when Honda Motor Co Ltd (ADR) (NYSE:HMC) and others were purchasing the credits at fairly meaningful levels. Still, with programs such as California’s Zero Emission Vehicle Program, or ZEV, going into effect, the future looks bright for Tesla Motors Inc (NASDAQ:TSLA) and the electric car.
California rule change and Tesla
The change that’s expected from the California Air Resources Board is an alteration to the “fast refueling” rule that gave extra zero-emissions credits to vehicles with easily switched batteries. A demonstration with Tesla Motors Inc (NASDAQ:TSLA)’s Model S showed the battery could be switched in less than two minutes. To achieve the top tier of ZEV credit, a vehicle must have a city range of 300 miles and be able to be 95% recharged in 15 minutes. The Tesla S can only get there by virtue of battery switching. In the absence of the rule, the company would still receive credit, but at a significantly reduced rate.
The longer view for Tesla
While the short-term impact of regulation changes at the California Air Resources Board may dampen Tesla’s profits, the long-term view remains very positive. At the end of 2012, the California ZEV program was granted the waiver it needed from the U.S. Environmental Protection Agency to make its mandate on ZEVs law. Under the mandate, beginning in 2018, automakers will be required to sell an increasing percentage of ZEVs. The percentage begins at 4.5% in 2018 and rises to 22% in 2025. Companies will be able to achieve partial credit for hybrids, calculated based on each vehicle’s battery-only range.