If you’ve followed Tesla for any meaningful amount of time, you’ve no doubt heard of “regulatory credits.”
Essentially, governments around the world aim for cars to eventually become zero-emission, so they impose electric-vehicle quotas that car companies must meet to achieve these goals. If they can’t, they could face various financial penalties.
Or, they have another option: buy credits from a manufacturer that makes more EVs than they do. As the world’s longtime leader in EV sales (until fairly recently, really), Tesla benefited tremendously from that system for many years. The system brings in billions of dollars for Tesla every year and has worked to offset declining profits as its vehicle sales fall.
But if the Trump administration, which is suddenly in no mood to be doing any favors for Elon Musk, and Congress get their way, that party could be over soon.
That kicks off this Monday edition of Critical Materials, our morning roundup of industry and technology news. Also on deck today: Even China is getting nervous about BYD’s rise in the auto sector, but it’s due to make a deal with the European Union on EV prices soon. Let’s dig in.
30%: Congress Has Bad News For Fuel Economy Rules, And Tesla
Photo by: AdobeStock
The Trump administration really, really wants everyone to be using more gasoline. Its assault on the electrified vehicle space has been relentless, including unilaterally canceling EV charger funding, seeking to end the EV tax credit and having allies in Congress push for increased annual fees for EV and hybrid drivers.
But for environmental advocates, the worst may be yet to come. As our friends at Heatmap News (subscription required) reported Friday, a new provision in the U.S. Senate’s version of Trump’s signature budget bill would take penalties for violating the Corporate Average Fuel Economy (CAFE) standards down to $0.
In essence, automakers would pay no fines for failing to meet whatever fuel economy standards do end up existing. If that gives car companies a giant pass to make more polluting cars, it’s a huge problem for public health and the climate in the U.S. and beyond. That’s the biggest problem at work here.
And it will also have a major downstream effect. Neutering the CAFE penalties basically means Tesla, in particular, can say goodbye to the regulatory credit program. Here’s Automotive News to explain:
In Congress, Senate Republicans proposed eliminating fines for automakers who fail to meet the rules as part of a wide-ranging tax bill — a boost to the Detroit 3 and gasoline-powered vehicles, Reuters said.
The Republicans’ proposal also makes emissions credits sold by Tesla less valuable as rivals won’t have to pay Tesla to comply with the rules. It could save the Detroit 3 hundreds of millions of dollars. Tesla and other EV makers have thrived on emissions credits paid by their competitors for years.
If Trump and his allies in Congress really want to go after Musk, this is the way to do it, particularly if coupled with an end to consumer tax credits for EV purchases.
To be clear, this move has been in the works for a while, and certainly isn’t driven by the Musk-Trump feud that erupted into public view last week. But if the president and Tesla’s CEO really are on the outs, the latter won’t have the influence he’d need to stymie such a plan—and things were certainly trending against EVs even before they had their breakup.
Now, Tesla isn’t the only automaker that reaps regulatory credits; Rivian does this too. But Tesla sells so many EVs and has taken advantage of the program for so long that it’s become a major revenue source for the Musk-led automaker. Toward the end of last year, regulatory credits made up 40% of Tesla’s profits—not even revenue, but profits.
Transportation Secretary Sean Duffy said the moves aim to make cars more affordable, since they won’t be as complex in order to meet tougher fuel economy and emissions rules. That, however, very much remains to be seen.
60%: Even China Is Spooked By BYD
Photo by: Kevin Williams/InsideEVs
Meanwhile, the long-awaited consolidation of the Chinese automotive industry may soon be underway. In short, China may be the biggest auto market in the world, but it’s full of too many brands and too many models competing for a too-small pool of buyers—and one that isn’t buying cars quite at the wild pace it used to. InsideEVs’ chief China-watcher, Kevin Williams, noticed this trend at the Shanghai Auto Show this year, even if his editor (me) was still astounded by the volume of cars he saw there.
And then you have the big price war going on in China right now. Car companies are slashing prices left and right in an attempt to woo buyers and force their competitors to bleed to death in the process. None more so, apparently, than BYD, which is now the world’s largest maker of hybrids and EVs.
BYD is definitely leading that effort and even China’s government is trying to step in and say, “Okay, enough.” More from Bloomberg:
For all the Chinese government’s efforts to prevent price cuts by market leader BYD Co. from turning into a vicious spiral, analysts say a combination of weaker demand and extreme overcapacity will slice into profits at the strongest brands and force feebler competitors to fold. Even after the number of EV makers started shrinking for the first time last year, the industry is still using less than half its production capacity.
Chinese authorities are trying to minimize the fallout, chiding the sector for “rat race competition” and summoning heads of major brands to Beijing last week. Yet previous attempts to intervene have had little success. For the short term at least, investors are betting few automakers will escape unscathed: BYD, arguably the biggest winner from industry consolidation, has lost $21.5 billion in market value since its shares peaked in late May.
“What you’re seeing in China is disturbing, because there’s a lack of demand and extreme price cutting,” said John Murphy, a senior automotive analyst at Bank of America Corp. Eventually there will be “massive consolidation” to soak up the excess capacity, Murphy said.
That story also says the government is worried that “relentless discounting” will hammer revenue and lead to cutting corners on quality, right as offerings from companies like BYD, Zeekr, Xpeng and Nio are gaining prominence on the world stage. China wants “Made-in-China” to not be the pejorative it often is, and this isn’t helping.
Meanwhile, BYD is so big and so powerful that it may end up the last man standing here:
“It’s obvious to everyone that the biggest player is doing this,” Jochen Siebert, managing director at auto consultancy JSC Automotive, said. “They want a monopoly where everybody else gives up.” BYD’s aggressive tactics are raising concerns over the potential dumping of cars, dealership management issues and “squeezing out suppliers,” he said.
Can BYD be stopped?
90%: China, EU Nearing Deal On EV Prices
BYD Dolphin Surf (2025) in a short test
Photo by: BYD
If China is becoming a rut, there’s always Europe. And the European Union and China may make a tariff-related deal soon, reports Bloomberg:
The two sides are hammering out an agreement after the EU imposed steep tariffs on Chinese EV imports last year, alleging state subsidies gave the country’s vehicles an unfair advantage.
Negotiations took a “big step forward in the right direction of a proper resolution” when China’s Commerce Minister Wang Wentao met with European Union Trade Commissioner Maros Sefcovic in France earlier this month, according to a statement from the Chinese ministry released Saturday.
The EU has extremely aggressive climate goals, but it’s torn between those and not wanting to nuke its own auto industries.
100%: Are Regulatory Credits A Fair Deal?
2025 Tesla Model Y Juniper
Photo by: Tesla
A lot of Tesla critics over the years have hammered the company for how much it’s profited from credit sales alone. Personally, this has never bothered me all that much; it’s what’s in the law, so you can’t blame a smart company for taking advantage of it. If anything, it’s less a Tesla problem and more of a federal policy one.
But that may be taken away entirely soon enough. Should it be, however? Is the regulatory credit system a good one for promoting the growth of cleaner vehicles, or just an enrichment scheme for one company? Let us know what you think in the comments.
Contact the author: patrick.george@insideevs.com
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