For more than a decade, Tesla has inflated its profits by selling regulatory carbon credits to other automakers. Those sales have brought in nearly $11.8 billion USD for the company since 2010.
The credits allowed automakers to continue selling gas-guzzling SUVs and cars without paying heavy fines, by complying on paper with CAFE (Corporate Average Fuel Economy) standards.
Elon Musk called for the end of subsidies... and got it
Tesla boss Elon Musk openly advocated for the end of government subsidies, for electric vehicles and for oil and gas. Washington has now ended tax credits for EVs and eliminated fines for automakers failing to meet CAFE standards. As a result, the main driver of Tesla’s profitability for the past decade is disappearing.
A heavy dependence on carbon credits
According to analyst Gordon Johnson of GLJ Research, “without the sale of regulatory credits, Tesla loses money in its core business.” These sales sometimes accounted for up to a third of its quarterly revenue. Several automakers had even signed long-term contracts with Tesla to ensure a supply of credits.
However, starting in 2026, demand is expected to drop by 75%, before disappearing completely in 2027, according to analysts at William Blair & Co.
Impact on image and sales
Adding to this financial blow is the well-publicized image problem Elon Musk has given himself via his political involvement with the Trump administration; Tesla's global reputation has been undeniably tarnished.
This comes as electric vehicle sales stagnate, and as the disappearance of the $7,500 USD federal tax credit risks threatens to cause a collapse in sales in the U.S., the brand's domestic market.
Rougher seas ahead
While Tesla has been profitable without counting the carbon credit revenue for a few years, its dependence on credits has recently increased, especially with the slowdown in global sales. The company will now have to rely solely on its actual sales performance, which could force major cuts and/or an aggressive sales relaunch.
The obvious irony here is that Elon Musk got what he asked for. And now, the end of subsidies and regulatory fines could end up costing Tesla dearly and further weaken its position in an increasingly competitive EV market.