After Tesla Motors Inc. sold $139 million of zero-emission credits in the third quarter, CEO Elon Musk complained that they should be worth more -- if only California’s regulations were tougher. Instead, they may soon be worth less.
The staff of the California Air Resources Board is planning to propose as early as this week that the state’s emissions targets remain largely unchanged through 2025 and then jump thereafter, according to three people with knowledge of their plans. This may disappoint environmental groups, who’ve been pushing the board to strengthen the mandates.
The extension of the status quo also would come as a blow for Musk, who funded Tesla to help create what he has called “a solar-electric economy.” He wants stricter zero-emissions standards that would boost demand for electric vehicles, including Tesla’s, and force other automakers to sell more of these models instead of using credits to meet their goals.
The board’s “credit mandate is incredibly weak and needs to be fixed,” Musk said on an Oct. 26 conference call to discuss earnings results with analysts. They “really should be doing more; it is unfortunate that they are not.”
There’s currently an oversupply of the credits in California, and if it continues, zero-emission vehicles could account for just 6 percent of sales by 2025, compared with the board’s earlier projection of 15.4 percent, board member Dan Sperling has said.
“When you have a weak mandate, obviously the value of those credits decline,” Musk said on the call. “There were some quarters where we simply cannot even find a buyer for credit. And then when we can find a buyer, it’s typically 50 cents on the dollar.”
The California board said Tesla sold 80,227 credits during the 11 months through August, which accounted for 86 percent of the total. And even at prices below what Musk wants, the sales helped Tesla report a profit excluding some items of 71 cents a share in the third quarter instead of a loss of 18 cents, according to calculations by UBS analyst Colin Langan. Tesla had only about 3,500 credits left as of Aug. 31.
The board is reassessing its targets as part of the mid-term review of President Barack Obama’s fuel-economy and emissions goals for 2025. California is the biggest auto market among U.S. states and has the authority to set pollution rules that are more stringent than national standards. It currently requires that a portion of each company’s sales come from electric or other nonpolluting vehicles and allows manufacturers to buy credits from a competitor if they fall behind.
Chairman Mary Nichols and other board members will meet Dec. 8-9 to decide whether to use the staff recommendations as the basis for formal rule making. The proposals are unlikely to please Musk, who said he may write “a longer blog piece” to explain his position.
“It’s just inconvertibly true that the oversupply of credits is going to allow manufacturers to comply by putting the absolute minimum number of electric vehicles out there,” said Diarmuid O’Connell, vice president of business development for Tesla. “History shows that with few exceptions, manufacturers only ever deliver the minimum number of electric vehicles to comply with regulations. These two facts will mean significantly fewer zero-emission vehicles than the ARB has previously committed to, and also fewer than the governor publicly supports.”
In February 2013, Governor Jerry Brown issued an executive order calling for 1.5 million ZEVs to be operating on California roads by 2025.
The board’s regulations may tighten in subsequent years. It is bound by a new law requiring the state to slash greenhouse-gas emissions 40 percent below 1990 levels by 2030. In a recent report, the board’s staff said cuts of this magnitude could mean 40 percent of California’s vehicle sales would need to be zero-emission or gas-electric plug-ins by 2030. The staff will make a formal proposal along these lines as early as this week, the people familiar with the situation say.
When asked for comment, Stanley Young, a spokesman for the board, said: “Incentives and regulation work together in this early market, and over the next year, we’ll be focused on how we use both to build the most vibrant market possible for ZEVs in California through 2030.”
Automakers have stopped turning to the courts to block increases in the regulations. But they do complain that Nichols and other regulators underestimate the costs involved, especially when the companies also are trying to meet Obama’s goal of boosting national fuel economy to an average of 50.8 miles per gallon in 2025 from 35.5 mpg this year.
Manufacturers have privately told the board they plan to introduce 68 battery-only, plug-in hybrid or fuel-cell vehicles in California by 2021, up from 24 now. That’s even though demand in the state for these models has been stalled at about 3 percent of sales since 2014. Relatively low gasoline prices and a lack of electric charging stations are among the reasons.
Some companies are just gearing up meet their goals, and Musk says Tesla plans to be turning out 500,000 vehicles a year by 2018.
“We’re still highly confident of reaching volume production in the second half of next year,” Musk said on the call.