Tesla has pocketed $11 billion from the sale of regulatory credits to rival automakers needing help to hit tough emissions targets — easy money that could dry up if President-elect Trump rolls back Biden-era regulations.

Why it matters: Tesla's billionaire CEO, Elon Musk, is spearheading Trump's effort to cut government red tape.

• In this case, reversing Biden's environmental policy would significantly hurt his own company's bottom line.

Follow the money: In the nine months through September 2024, 43% of Tesla's $4.8 billion in net income came from selling regulatory credits to other carmakers.

• Since 2012, 34% of Tesla's total $32 billion in profits have come from such credit sales.

Where it stands: Absent a change in policy, that revenue stream is likely to soar in coming years as legacy carmakers scramble to buy emissions credits from Tesla, which generates such credits with every vehicle it produces.

• But if those credit revenues disappear, Tesla — facing falling vehicle sales — would see its profit margin lag that of GM.

The big picture: Transportation is the leading source of climate-changing carbon emissions. The Environmental Protection Agency under President Biden has enacted ever-stricter limits on tailpipe emissions.

• Starting with the 2023 model year, automakers' fleet-wide emissions must decrease an average of 8% a year through 2026, compared with a typical 2% annual improvement in the past.
• The rules get even more stringent starting with the 2027 model year. From that point on, fleet-wide emissions must fall by about 11% per year through 2032.

Between the lines: While selling hybrid vehicles and more efficient gas cars and trucks certainly helps, lots more EVs are essential to hitting such targets.

• The EPA estimates that compliance would mean 56 percent of new cars sold will be electric by 2032.

The other side: Trump claims Biden's policies are akin to an "EV mandate" and has said he'd relax EPA standards, as he did during his first term.

Friction point: In the meantime, EV sales aren't increasing as fast as expected, which means carmakers face substantial penalties for noncompliance.

• One way to avoid such fines is to purchase tradeable emissions credits from companies that have exceeded the standards by selling lots of electric cars, primarily Tesla.
• As long as EPA standards keep rising and EV sales lag, demand for credits will increase, driving up the costs of compliance for most automakers — and fattening Tesla's coffers.

State of play: It's already happening.

• In 2023, the first model year that Biden's higher standards went into effect, Tesla sold $1.8 billion worth of credits, including 34 million federal greenhouse gas credits, to other automakers.
• Through the first nine months of 2024, it's already taken in $2.1 billion in credit revenue, with year-end figures expected Jan. 29.
• Tesla said the 53% increase over the prior nine months was "driven by demand for credits in North America as other automobile manufacturers scale back on their battery electric vehicle plans."

Zoom in: Ford Motor is among the companies trying to scoop up emissions credits to ensure compliance while it reins in its EV plans in favor of more hybrids and plug-in hybrids.

• Ford disclosed in July that it had contracts to purchase about $3.8 billion of regulatory compliance credits for use in North America and Europe for current and future model years, including $100 million it spent during the second quarter of 2024.
• In October, Tesla said it has long-term contracts to sell $4.7 billion of credits, including $683 million in sales expected in the next 12 months.

Of note: Credits are also traded to comply with other state and federal regulations, including California's zero-emission vehicle program.

• In Europe, Tesla could collect more than $1 billion in compensation from Stellantis, Toyota, Ford, Subaru and Mazda, which are pooling emissions with Tesla to avoid big fines, according to UBS analysts.

The intrigue: No company wants to pay a competitor for help complying with the law, but for most automakers, purchasing regulatory credits — just like buying steel or rubber — is now a cost of doing business.

• There is no central marketplace. Instead, credit transactions are handled privately between firms, sometimes under long-term contracts.

How it works: The EPA sets an increasingly-stringent emissions standard, measured in grams of carbon dioxide per mile, for each manufacturer's car and truck fleet.

• The permitted level of emissions is a sales-weighted target based on the average "footprint" (the area between the four tires) of the vehicles each automaker produces. The larger the footprint, the greater the emissions any given vehicle is allowed to produce.

If a carmaker's fleet-wide performance comes in below the EPA limit, they earn credits for that model year. If it is above the limit, they generate a deficit.

• Manufacturers have lots of flexibility to comply, including banking credits from year to year or trading with other companies.

Between the lines: EVs, plug-in hybrids and other alternative-fuel vehicles are incentivized with credit "multipliers," which is why Tesla, a pure EV manufacturer, earns the most credits every year.

• Other EV makers, including Rivian and Lucid, as well as hybrid leaders such as Honda and Toyota, also earn extra credits but nowhere near as many as Tesla.
• The perennial biggest seller of credits is Tesla. The biggest buyer has often been Stellantis, maker of Ram pickups and Jeep SUVs, which is starting to add hybrid and electric powertrains.

The bottom line: Trading emissions credits is big money, and Tesla is the clear winner, as long as Trump doesn't pull the rug out from under his First Buddy.

President-elect Trump understands the U.S. auto industry better now than he did during his first term, says Ford chairman Bill Ford, who's hopeful that Tesla CEO Elon Musk will use his close relationship with Trump to advocate for all automakers.

Why it matters: Trump had a fraught relationship with Detroit carmakers during his first term, and the companies often sparred with the president over labor, trade, tariffs and regulations.

• But this time around, he's keenly aware of the competitive threats they face, especially from heavily subsidized Chinese rivals.

Driving the news: Ford said Trump called him "out of the blue" recently and the two men spoke for "a long, long time" about what U.S. automakers need to succeed.

• "He's very tuned into the importance of a strong American industry. He wants to not only keep it strong, but actually strengthen it from here," Ford told reporters on the sidelines of a product announcement at the Detroit Auto Show.
• "It's very clear what his intent is."
• Ford also said he wasn't too worried that Musk will use his close relationship with Trump to get an advantage over Tesla's rivals.
• "We are aligned on a lot of different things," he said of Musk.
• And given that Trump has his number, Ford said, "I feel very confident that, going forward, Ford will have a voice, and a seat at the table."

Between the lines: Ford said affordability is the key to facing the "crucible" of Chinese competition on electric vehicles.

• "It's not matching the technology. It's not matching how the vehicles are put together. It's really not even matching the battery itself. But it really is the affordability to the customer that becomes, sort of the crucible, whether this is going to succeed or not. We're working really hard on that."

Regardless of how President-elect Trump changes the Biden administration's long-term climate policies, automakers are already panicking about state-level electric vehicle mandates just around the corner.

• In California and 11 other blue states that follow its lead, 35% of new cars must be electric starting with 2026 models — some of which will be in showrooms as early as next spring.

Why it matters: Carmakers are not even close to meeting those requirements.

• In many states. they would need to double or triple their EV sales in just one year — an unrealistic goal given the average $57,000 price of an EV and the lack of charging infrastructure, companies tell Axios.
• It's all likely to come down to a bitter fight between Trump and California's Democratic Gov. Gavin Newsom, who has presidential ambitions of his own.

The stakes are enormous — not just for automakers and car dealers, but also for consumers.

• Funneling more EVs into markets that don't want them is "unnatural" and will "distort" the business, says Jack Hollis, president of Toyota Motor North America.
• "It's going to limit a customer's choice of the vehicles they want," he told reporters Friday.
• Automakers, meanwhile, fear they'll have to choose between swallowing bigger losses on EVs or sacrificing profits on gasoline vehicles — neither of which is palatable.

State of play: The 1967 Clean Air Act gave California a waiver to set its own greenhouse gas emissions standards, which typically outpace federal standards set by the Environmental Protection Agency.

• The law allows other states to choose whether to adopt California's standards or stick with the federal rules.
• In 2022, California's Air Resources Board (CARB) adopted the strictest rules yet, ratcheting up the percentage of zero-emission vehicles from 35% for the 2026 model year to 100% by 2035, effectively eliminating gasoline cars.
• Eleven states, plus Washington, D.C., have adopted California's latest rules, representing nearly 40% of the nation's vehicle market.

Where it stands: EV sales have been growing steadily, but currently make up only about 9% of U.S. auto sales.

• In California, EVs account for nearly 26% of new car sales — putting that 35% goal by 2026 potentially within reach.
• Many of its blue-state allies, however, lag far behind, according to the Alliance for Automotive Innovation.
• Washington, Colorado and D.C. are around 19% EV share, while others, including Massachusetts, Vermont and Maryland are closer to 11%.
• Of all the CARB-following states, New York is farthest off the pace at less than 10% EVs.

Alarm bells are ringing across the industry as each automaker calculates its own compliance risk.

Between the lines: Automakers basically have three options, none of them good for business:

• They can dump more discounted EVs into those 11 states to lure buyers. But that would just widen their billion-dollar losses on EVs.
• They could instead throttle back sales of gasoline trucks and SUVs in the affected states to make the EV sales ratio easier to meet. But that would choke off badly needed profits to fund their EV investments.
• They could buy compliance credits from Tesla, a pure-play EV manufacturer. But as the rules tighten, demand for those credits will increase, making them more expensive.

What to watch: The situation between Trump and Newsom.

• In 2019, Trump revoked California's waiver to set its own emissions standards, triggering a chaotic legal battle which ended when Biden later reinstated the waiver.
• This time around, California has taken steps to "Trump-proof" its clean air strategies, including voluntary agreements with industry, Politico reported.

Other states, which adopted California's tailpipe standard without enacting other policies to support EV growth, might opt to revert to the federal standards.

• While new rules set by the EPA under Biden would also compel carmakers to sharply accelerate EV sales in the coming years, industry leaders expect Trump to ease those requirements.

The bottom line: John Bozzella, CEO of the Alliance for Automotive Innovation, tells Axios: "You can't get ahead of the customer; the customer is in charge."