Tesla's Regulatory Credit Cash Cow Is Fading Fast: Why it Matters

For years, Tesla TSLA has made big money not just from selling electric vehicles (EVs), but also from selling regulatory credits to other automakers. These credits have aided Tesla's overall margins, even when car sales were under pressure. But that extra boost is shrinking fast now. And if the trend continues, it could just worsen things for the company.

Tesla has been selling billions of dollars’ worth of regulatory credits to legacy automakers who needed them to offset their gas-guzzling vehicle fleets and avoid fines. The revenues—more than $10.6 billion since 2019—have been a critical boost to Tesla’s profits, especially during times when the core business struggled to stay in the black.

In Q2’25, Tesla reported $439 million in regulatory credit revenues. On the surface, that still looks solid. But the trend tells a different story. Credit sales have fallen sharply from $890 million in Q2’24, marking a nearly 50% drop in just a year. And it’s not a blip—it’s a steady slide. From $739 million in Q3’24 to $692 million in Q4’24, then $595 million in Q1’25—and now $439 million.

Policy Shifts and EV Competition Add Pressure

Last month, President Trump’s tax and spending bill officially scrapped the penalties for automakers failing to meet Corporate Average Fuel Economy (CAFE) standards. That’s a game-changer. Automakers who previously bought credits from Tesla to avoid hefty fines—over $1.1 billion worth from 2011 to 2020—now have no reason to do so. The penalty is effectively gone.

That removes the key incentive behind Tesla’s regulatory credit windfall. And it couldn’t come at a worse time. Tesla is already facing a slump in deliveries and profits. The company recently posted two straight quarters of delivery declines. Without credit sales to somewhat plug the gap, Tesla’s core business will face more pressure.

Some automakers may still have long-term credit purchase agreements with Tesla, but those contracts may be renegotiated—or even canceled—early. In fact, the credit revenues could disappear by next year.

And it's not just the policy shift. Many legacy automakers like General Motors GM, Ford F and Stellantis STLA are also shifting their gears to electric. As they scale up their EV output and reduce emissions, they need fewer regulatory credits.

A Fading Lifeline Tesla Can’t Ignore

While headlines are busy tracking CEO Elon Musk’s political battles or the loss of $7,500 EV buyer tax credits, this regulatory credit risk of Tesla has not gotten much attention. But the risk is real—and growing.

Regulatory credits have quietly propped up Tesla’s profits for years. But the safety net could be vanishing. Unless Tesla can make up for the loss with stronger sales, tighter cost controls or big wins in robotaxis, the road ahead could get bumpier.

The Zacks Rundown for Tesla

Shares of Tesla have lost around 20% over the past six months compared with the industry’s decline of 17%. Meanwhile, shares of Ford and General Motors are up 8% and 10%, respectively, while Stellantis is down 32% during the same timeframe.

From a valuation standpoint, TSLA trades at a forward price-to-sales ratio of 9.5, way above the industry. It carries a Value Score of D. Meanwhile, General Motors trades at a forward sales multiple of 0.28, Ford at 0.27 and Stellantis at 0.14.

See how the Zacks Consensus Estimate for TSLA’s earnings has been revised over the past 90 days.

Tesla stock currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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This article originally published on Zacks Investment Research (zacks.com).

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