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Carbon credits, not car sales, drive Tesla’s fortune

By Ricky Browne

Elon Musk may currently be the richest man on Earth, but he didn’t make most of his money by selling his Tesla-branded electric cars.

While Musk’s SpaceX had yet another of its spaceships explode on landing on February 3, his Tesla company seems to have had no problem with its rocketing stock prices.

What drives Tesla?

The value of Tesla’s shares have risen more than 10 times since March last year, according to the Financial Times, and the company is now valued at about US$816 billion. The company only made its first profit last year.

Profitable or not, this makes Tesla’s value greater than six of the world’s top carmakers – combined. That includes: Toyota, Volkswagen, Mercedes Benz (Daimler) General Motors, Ferrari, BMW and Honda.

Earlier this year, Forbes announced that Musk was the world’s richest billionaire thanks to the new valuation – with a fortune of about US$185 billion. That put him ahead of Amazon’s founder and CEO Jeff Bezos.

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How high can he go? Graphic: Marketingmind

But Tesla does not make the majority of its profits from the sale of its high-tech electric cars.

In fact Musk’s business model to billionaire status was built on the sale of carbon credits, to those more established car companies that are still pushing out vehicles with traditional gas and diesel engines. Tesla earns carbon credits by virtue of producing electric cars which by their definition emit low levels of carbon. They can then sell these carbon credits to companies that are still producing gas and diesel powered vehicles, to allow them to offset the penalties they may otherwise pay.

Its a bit of accounting wizardry that allows traditional car companies to continue to churn out their dated technology — and on the flip side allows companies like Tesla to boost their profits.

“Tesla’s current business model is about selling carbon credits to other carmakers rather than making electric cars,” says Ismail Erturk, senior lecturer in banking at the Univeristy of Manchester’s Alliance Manchester Business School.

ERTURK… about 70 percent of Tesla’s profits come from carbon credits

“About 70 percent of its current operating profits come from carbon credit sales,” he said.

In Tesla’s latest results the company made US$575 million – but that just over US$400 million of that came from the sales of carbon credits to traditional car companies.

Carbon credits allow traditional car companies to kick the can further down the road, and to continue to produce their dirty engines. They do not help to create cleaner air. They allow dirty car engines to still be produced. They are therefore the antithesis of clean air. And buyers of Tesla are actually helping to promote this.

Three Tesla models

“A disruptive carmaker with a narrative about innovation and green economy currently relies on old technology carmakers polluting the environment for most of its profits,” Erturk said.

This goes against the commonly held public view that Tesla has made its billions through its superior new technology, at a time when the world is concerned about the effects of climate change.

Ain’t nothing gonna break my stride

Indeed the stock market price of Tesla has increased at an astronomical rate. For most of the last five year period Tesla stock sold for about US$50. But at the beginning of 2020 that rate started to climb, ending the year at US$706 and making Musk the world’s wealthiest man on the way.

Graph looking at Tesla share price, and forecast price. Source: Walletinvestor.com

This year the climb has continued at a deaccelerated rate, trading at US$872 on February 2, and the chance for speculators to jump on the electric band wagon seems to have faded.

“Narratives seem to drive the extraordinary valuation of Tesla rather than a realistic assessment of the sustainability of its current business mode,” Erturk notes.

“In S&P 500 Tesla is classified as a consumer discretionary – subsector automotive- business.

“Given that 70 percent of its operating profit comes from trading carbon credits, isn’t Tesla more like a financial company, relying on income from trading a potentially volatile asset?” Erturk asked.

He notes that there is a danger in this type of model.

MUSK… Tesla stock price is too high imo

“Relying on capital markets to solve the environmental issues, (ie financialization of environmental problem) and trusting financialized capital markets (ie yield searching mechanisms, to allocate capital to productive economy for sustainable growth) are likely to produce disappointments in solving environmental problems and generating equitable prosperity.”

In the words of Elon Musk in May year … “Tesla stock price is too high imo.” But since then the stock has continued to rise.

Tesla is estimated to have about 82 percent of the electric vehicle (EV) market in the United States. And the car has become an aspirational product, especially for people who feel guilty about the damage they bring to the planet via their excessive use of energy.

It’s a different story on the global stage. Tesla is still the leader in the global EV market, but only controls 18 percent of it. Next on the list is Volkswagen with about six percent of sales. But as that market grows, even if Tesla’s portion of that market shrinks – it should still be selling a greater number of cars than presently.

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