A major source of Tesla’s profits—revenue from regulatory credits—is rapidly drying up as the U.S. government shifts its policies around emissions incentives, according to a new report.
When Tesla (NASDAQ: TSLA) announces its second-quarter earnings on Wednesday, investors are expected to press CEO Elon Musk on several key topics: how quickly the company can turn its robotaxi pilot into a profitable business, how it plans to reverse declining sales for a second consecutive year, and speculation about Musk’s political ambitions.
But a less headline-grabbing concern—the future of regulatory credits—could prove just as significant. Traditional automakers buy these credits from EV companies like Tesla to offset the emissions of their gasoline-powered vehicles. This income was crucial for Tesla in Q1, effectively propping up the company’s profitability. Without it, Tesla would have reported a quarterly loss.
Now, the sustainability of this revenue stream is in doubt. The U.S. government originally created these credits to encourage zero-emission vehicle production, penalizing manufacturers of internal combustion engine (ICE) vehicles who didn’t meet emissions targets. But new legislation signed by President Donald Trump will eliminate penalties for automakers that fail to comply with Corporate Average Fuel Economy (CAFE) standards, significantly reducing the demand for these credits.
“This makes ICE vehicles more competitive while weakening incentives for EVs,” said Batt Odgerel of the Energy Policy Research Foundation, who warned that Tesla could lose both credit revenue and market share.
The future of other credit programs, including those from the EPA and California’s ZEV (Zero Emission Vehicle) initiative, is also murky due to proposed rule changes and ongoing political and legal battles.
Chris Harto of Consumer Reports noted that automakers heavily reliant on credit sales—Tesla most of all—stand to lose significant revenue if these programs fade.
Faster Decline Than Expected
Analysts are closely watching how rapidly Tesla’s credit revenue is shrinking and whether credits from the EPA and California remain stable. Other EV manufacturers like Rivian and Lucid (NASDAQ: LCID) also generate revenue from credits.
Analysts at William Blair estimate that roughly 75% of Tesla’s credit revenue comes from CAFE-related sales. After the new law was passed, they slashed their 2025 forecast by nearly 40%, projecting revenue of $1.5 billion, falling to $595 million in 2026, and disappearing entirely by 2027.
This decline is steeper than many on Wall Street expected. According to Visible Alpha, 14 analysts now predict Tesla’s credit revenue will fall 21% this year to $2.17 billion, with continued declines in the years ahead.
“The removal of CAFE penalties forces a complete re-evaluation of credit revenue expectations,” William Blair analysts noted.
While Tesla has long anticipated a gradual decline in credit revenue as more legacy automakers expand their EV production, the current pace of decline is far more abrupt. Tesla itself has admitted that a drop in credit demand and pricing could “harm” its financial performance, though it declined to comment further.
Regulatory credits, which cost Tesla virtually nothing to produce, were essential in keeping the company afloat in earlier years. Even though surging Model Y sales once made credit revenue less critical, recent sales declines and aggressive discounting have made credits a crucial support for profit once again.
While Tesla faces growing pressure, legacy automakers like General Motors (NYSE: GM), Ford, and Honda (NYSE: HMC) stand to benefit—not just from reduced emissions penalties, but also from the early termination of a $7,500 federal EV tax credit, now expected to end in September.
