As we all know, Musk's Tesla makes money by selling and renting electric vehicles. In addition, Tesla also has an energy storage business and a solar power generation system business. These are Tesla's money-making machines.
What you may not know, however, is that Tesla has another extremely important source of revenue.
In the 10 years from fiscal year 2012 to fiscal year 2021, this revenue stream contributed a total of $5.34 billion to Tesla's operating income.
It can even be said that this more than 5 billion US dollars is almost equivalent to the net profit of Lying Win.
This source of income, which can be described as out of thin air, is the famous new Internet celebrity: carbon credits.
In the first quarter of fiscal 2022, just released in April, Tesla's carbon credit sales continued to soar, contributing $679 million to the quarter's revenue.
Next, we will analyze several indicators related to Tesla's carbon credits, including annual and quarterly revenue data, percentage of total revenue, growth rate, and the impact of carbon credits on gross margin and net profit.
This article includes the following sections:
1. What is carbon integration?
2. Zero emission vehicle credits and greenhouse gas credits
3. Tesla's carbon credit sales revenue
4. Carbon credit sales revenue by year
5. Carbon credit sales revenue by quarter
6. The ratio of carbon credit sales revenue to total revenue
7. The growth rate of carbon integral sales revenue
8. The impact of carbon credit sales revenue on the gross profit margin of the automobile business
9. The Impact of Carbon Integral Sales Revenue on the Gross Profit Margin of Automotive Business (Based on TTM)
10. The impact of carbon credit sales revenue on operating profit
11. The impact of carbon credit sales revenue on net profit
12. Conclusion
1. What is carbon integration?
What is carbon integration?
The English name of the carbon credit is Regulatory Credits, which literally translates to regulatory credit, which is a point given by the U.S. federal government and various state governments to encourage zero-pollution behavior in the environment.
In more than a dozen states, including California, the law requires all vehicles manufactured and sold by automakers such as Tesla, Ford, and General Motors to meet certain minimum emission standards.
Otherwise, they face hefty fines or the risk of being revoked by state governments for failing to meet these emissions standards.
In short, automakers must meet these emission standards. To meet these emissions standards, they have only two paths to go: one is to improve their own vehicle emissions, such as transitioning to 100% compliant emission-free electric vehicles; and the second is to buy carbon credits from other automakers with excess carbon credits, such as Tesla, to offset their own negative credits.
The law stipulates that automakers such as Tesla can retain excess carbon credits if they receive more carbon credits than the minimum requirement. Automakers with excess carbon credits can sell their carbon credits to other manufacturers, who can buy these carbon credits to meet compliance requirements.
2. Zero emission vehicle credits and greenhouse gas credits
Tesla makes electric cars, so there is no carbon emissions. Over the years, Tesla has earned a large number of carbon credits in California, sometimes called zero-emission car credits (ZEV credits), which Tesla can sell to other automakers.
Greenhouse Gas Credits (GHG Credits) Another type of carbon credit, similar to the Zero Emission Vehicle Credit, applies to the U.S. federal government level and requires automakers to comply with emissions standards.
According to Tesla's annual report for fiscal year 2021, tesla generated sales of up to $594 million, $1.580 billion and $1.642 billion, respectively, in the three years from fiscal 2019 to fiscal year 2021.
Since the production of carbon credits does not require any cost, you can think that Tesla has made a lot of net profits through carbon credits.
The good news for Tesla investors is that as Tesla's evictions continue to grow in the future, carbon credit sales revenue is likely to increase over time.
Don't forget, Tesla has less than 5% of the market share in the automotive industry in most parts of the world, and there is still a lot of room for growth. This is shown in the following figure.
Figure 1 Tesla motors market share
Source: Tesla's fiscal fourth quarter 2021 earnings
For this reason, when Tesla builds more zero-emission electric cars for the foreseeable future, Tesla's carbon credit sales revenue is likely to increase or even surge.
3. Tesla's carbon credit sales revenue
Carbon credit sales belong to one of Tesla's business units. This is shown in the following figure.
Figure 2 The location of carbon credit sales in Tesla's business structure
As you can see from the figure, carbon credits are sold under Tesla's automotive division. In the financial report, the sale of carbon credits is also detailed as a separate item.
4. Carbon credit sales revenue by year
In the automotive space, Tesla's carbon credit sales revenue is combined with other revenue sources (including new car deliveries, supercharger and autopilot sales, etc.) to get the total revenue of the automotive business.
In fiscal 2021, Tesla's carbon credit sales revenue accounted for only 3% of the total revenue of the automotive business, significantly lower than the 6% in fiscal 2020.
In the 10 years from 2012 to 2021, Tesla's cumulative carbon credit sales revenue reached $5.34 billion. This is shown in the following figure.
Figure 3 Tesla's carbon credit sales revenue over the years
As shown in the chart, Tesla's carbon credit sales revenue climbed rapidly from $41 million in fiscal year 2012 to $1.465 billion in fiscal year 2021.
Fiscal 2020 was a record of $1.58 billion in Sales of Tesla Carbon Credits, the highest revenue from carbon credit sales in the past 10 years.
Fiscal 2021 declined slightly, but still reached $1.465 billion.
In terms of growth, fiscal 2019 to fiscal year 2020 was the fastest period of growth in carbon credit sales revenue, from $594 million to $1.58 billion.
From the financial data, Tesla has benefited greatly from the sale of carbon credits while improving gross margins and profitability.
Looking ahead, Tesla's carbon credit sales revenue could reach $2.1 billion in fiscal 2022 and $2.9 billion in fiscal 2023, at a historical growth rate of around 40 percent.
5. Carbon credit sales revenue by quarter
On a quarterly basis, Tesla's carbon credit sales revenue has been growing steadily over the years, with fiscal 2020 being the best performing year, with carbon credit sales soaring to an all-time high of more than $300 million for four consecutive quarters.
Figure 4 Tesla's quarterly carbon credit sales revenue
According to the chart, Tesla received nearly $1.2 billion in carbon credit sales revenue in the first three quarters of 2020 alone, including zero-emission car credits and greenhouse gas credits.
In the fourth quarter of fiscal 2020, Tesla's carbon credit sales revenue reached $400 million. As of the fourth quarter of fiscal 2020, Tesla's carbon credit sales revenue has accumulated nearly $1.6 billion.
In the fourth quarter of fiscal 2021, Tesla's carbon credit sales revenue was $314 million, down 20% year-over-year.
6. The ratio of carbon credit sales revenue to total revenue
The chart below shows the ratio of carbon credit sales revenue to total revenue, expressed as a percentage.
Figure 5 Tesla carbon credit sales revenue as a percentage of total revenue
Graphically, the share fell sharply from 10 percent in fiscal 2012 to 2.4 percent in fiscal year 2019.
However, that percentage returned to 5 percent in fiscal year 2020, when Tesla reported a record $1.58 billion in carbon credit sales revenue in the same fiscal year.
As of fiscal year 2021, Tesla's carbon credit sales revenue was $1.465 billion, or 2.7% of total revenue, slightly lower than the previous year.
The continued decline in the ratio suggests that sales in Tesla's other revenue segments, particularly the automotive industry, are growing much faster.
While Tesla reported record carbon credit sales revenue in fiscal years 2020 and 2021, that percentage is less than 5 percent of the company's total revenue.
On the surface, the 5% ratio may seem negligible, but in reality it is almost on par with the size of the solar business in fiscal 2020.
The biggest benefit about carbon credit sales revenue is that it doesn't have any production costs and sales costs. Interestingly, because Tesla has not been profitable for many years, tesla actually needs to subsidize consumers for every car delivered.
7. Growth rate of carbon credit sales revenue
As you can see from the chart below, in addition to the decline in the growth rate in fiscal 2021, the year-on-year growth rate of Tesla's carbon credit sales revenue is positive in all fiscal years.
Figure 6 Tesla carbon credit sales revenue growth rate
In fiscal 2020, when carbon credit sales revenue soared to more than $1 billion for the first time, Tesla reported its best year-over-year growth rate of 166%.
Considering that the popularity of electric vehicles is still in its infancy and accounts for less than 5% of global car sales in 2020, Tesla's carbon credit sales revenue is likely to grow at double-digit high growth rates in the coming years.
8. The impact of carbon credit sales revenue on the gross profit margin of the automobile business
Critics argue that carbon credit sales artificially boost Tesla's gross margin, thereby improving the company's profitability.
These arguments are valid to some extent because Tesla's revenue from selling carbon credits may not be sustainable in the long run.
In the future, when most automakers turn to making electric cars, Tesla may not find a buyer for carbon credits.
Figure 7 The impact of Tesla's carbon credit sales on the gross profit margin of the automotive business
According to the chart, Tesla's carbon credit sales revenue will undoubtedly help raise the interest rate of the car gross business.
In Tesla's case, the contribution of carbon credit sales revenue to gross margins was as low as 2% and as high as 6%.
Tesla, for example, reported the largest increase in gross margin in fiscal year 2020 and a 6 percent increase in the second quarter of fiscal 2020, when revenue from carbon credit sales was recognized as part of car sales.
Similarly, when considering zero-emission vehicle credits and greenhouse gas credit sales, we saw a 3% increase in gross margins in the fourth quarter of fiscal 2020.
The impact of carbon credit sales continued into the fourth quarter of fiscal 2021, when Tesla's gross car business interest rate reached 30.6 percent, a record high for the company.
However, if carbon credit sales revenue were excluded from the measurements in the same fiscal quarter, the auto gross business rate would be only 29%.
In short, Tesla's carbon credit sales revenue significantly pulled up gross margins.
9. The Impact of Carbon Integral Sales Revenue on the Gross Profit Margin of Automotive Business (Based on TTM)
Similarly, Tesla reported that based on the TTM approach, the automotive business had the largest increase in gross margin throughout fiscal 2020 when carbon credit sales revenue was highest.
Figure 8 Impact of Tesla's Carbon Credit Sales on Gross Margin of Automotive Business (Based on TTM)
In most quarters of fiscal 2020, Tesla's automotive gross business interest rate differed by as much as 4 percent with and without carbon credit sales.
As of the fourth quarter of fiscal 2021, the gap between the gross margin of Tesla's automotive business and the revenue from carbon credit sales fell to 2%.
A notable trend is that since fiscal 2020, the gap between sales revenue with carbon credits and sales revenue without carbon credits has begun to diverge significantly, indicating that the impact of carbon credits on gross margin has increased significantly.
In the fourth quarter of fiscal 2021, Tesla's automotive gross business interest rate was 29.3% when carbon credits were included and 27% when carbon credits were excluded.
10. The impact of carbon credit sales revenue on operating profit
Can Tesla be profitable without carbon credit sales revenue?
Figure 9 The impact of Tesla's carbon credit sales on operating profit
Let's first look at Tesla's operating profit shown in the chart above.
The chart shows 2 operating profit charts, one with carbon integrals and the other without.
As the chart shows, Tesla's operating profit was $6.5 billion as of the fourth quarter of fiscal 2021.
However, after deducting revenue from carbon credit sales, this figure is only $5.1 billion. The gap between the two is enormous, at more than $1.4 billion.
Therefore, Tesla's carbon credits not only help to improve operating profits, but also help to improve operating margins.
Still, with or without carbon credit sales revenue, Tesla is profitable from an operational standpoint.
11. The impact of carbon credit sales revenue on net profit
Without carbon credit sales revenue, Tesla's net profit in the same quarter would be just $4 billion.
Figure 10 The impact of Tesla's carbon credit sales on net profit
At the same time, the sales revenue of carbon credits has a growing impact on Tesla's profitability.
It's worth mentioning the trend that Tesla used to be unprofitable without the help of carbon credit sales revenue.
However, this trend has reversed in recent years.
So even without carbon credit sales revenue, Tesla is still profitable as of the fourth quarter of 2021 and has achieved a net profit of up to $4 billion.
12. Conclusion
Looking back, Tesla's carbon credit sales revenue grew at an average annual rate of 40% between fiscal 2013 and fiscal 2021, with fiscal year 2020 being the best year for carbon credit sales to exceed $1 billion for the first time.
In fiscal 2020, Tesla reported sales revenue of $1.58 billion in carbon credits, breaking all previous records.
That figure fell slightly to $1.465 billion in fiscal 2021, down about 7 percent from fiscal 2020.
While Tesla's carbon credit sales revenue accounts for less than 5 percent of total revenue, it helps improve gross margins and boost profits.
The profitability of Tesla's auto business has improved significantly, and even without taking into account carbon credit sales revenue, tesla's auto business is still profitable.
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