Is Tesla still a climate company?

Carnivals, barked

Our readers are the best. One of them emailed, shortly after Tesla carnival barker CEO Elon Musk spent last Thursday evening showing and promising a lot of EV and robotics technology that will definitely launch on time, unless it doesn’t; 

“You guys are nerds about this stuff. Is Tesla actually good for climate and the environment or is it all bullshit?”

It’s a fascinating question, and significantly more complex to answer than hagiographic Musk biographies might lead you to believe. Let’s dive in. 

Scope them if you got them. 

In carbon accounting, which we’ll come back to at length, emissions from a given company are generally categorized into Scope 1, Scope 2, and Scope 3. While we do not suggest reading the official definitions of these buckets unless you happen to be suffering from severe insomnia, very broadly, Scope 1 are emissions direct from the corporate supply chain (ie, the electricity used in their factories), Scope 2 are the emissions from entities directly funneling into the supply chain (ie, the electricity used to power the factory of a key part supplier), and Scope 3 are all other indirectly caused emissions (ie, the fuel used to transport raw materials into the aforementioned supplier factory).

It’s very difficult to accurately measure these parameters, especially in the nebulous Scope 3. In answering our original question about Tesla, it’s perhaps most useful to consider reversing Scope 1- 3; How much crap has the company kept out of our air, either directly or via indirectly affecting? 

A lot. There were 1.2m EVs sold in the US last year, 55% of them made by Tesla. The EV market is expected to pass 10% of all auto sales in 2024, and grow market share significantly in years to come. This is a tremendous and unequivocal good for humanity. EVs have massively lower net emissions profiles (not zero, since the power does have to come from somewhere), are cheaper and easier to maintain (cutting down on the manufacture of replacement parts and the need for service), and are credibly thought to last longer in service. 

It’s perhaps most striking that the top 10 EVs by sales represent 6 different manufacturers. Tesla did much to create the market and get the auto giants taking it seriously. They provided a benchmark and technical bellwether. These are very good things and to be applauded. 

But. 

Extra Credit

We started with emissions accounting because, well, so did Tesla. The company has long, and quietly, been the top producer and revenue generator in the carbon credit market. It’s a good business. In Q4 2023, Tesla generated $554m in revenue from this activity. While this might not seem like much on an automaker’s balance sheet, the margins are a lot better than making and selling cars. That $554m created 29% of Tesla’s net income in the same quarter. 

Considering the company currently trades at about 61x earnings (more than double the average for the S&P 500, which is about 27x), the extra margin is hugely important. And, note that we’re writing after the ~12% drop in stock price from the absurd AV event. 

We’ve written about carbon credits before. Tldr; “This is bullshit financial engineering disguised as climate science, and profoundly irresponsible.” We were writing in that piece about a different company which had raised a few tens of millions of dollars, and generated one or two more in revenue from selling carbon credits. Tesla has sold $9bn or so of carbon credits since inception, primarily to other automakers in need of help to meet their emissions reduction targets, and unable to do so through, like, launching and selling real products. 

Like we said at the start, it’s complicated. Tesla inventing and open-sourcing battery technology is a wonderful thing. Tesla generating material revenue by providing cover to the rest of the industry from regulatory accountability and actual reduction of emissions is… not. 

We’re trying to leave our personal feelings about Elon mostly out of this piece, but it’s worth examining for a moment his recent support of former president Trump. This is, again, a subject where we have a lot of thoughts, but those are mostly irrelevant for today. 

Tesla stock is, to our eye, badly overvalued. GM sells about half as many EVs annually as Tesla, is investing billions in catching up, and trades at about 5x earnings. Ford is currently lower-producing, but has seen real traction with their well-reviewed MachE and F150 Lightning products, and is investing $12.5bn in becoming an EV powerhouse. They trade at 11x earnings. Tesla is, again, at a 61x multiple. 

The company is, to put it simply, about to get the crap kicked out of it in the open markets by bigger, better-funded, competitors who are very good at building tons of cars. It has clearly lost autonomy to Waymo, and the concept of 2-seater autonomous taxis with induction charging as a competitive differentiator is almost too stupid to refute. 

Ok, one small point. Induction charging is the transference of electricity via magnetic field between two metal coils in different objects. Yes, we know we’re simplifying, don’t yell. If you’ve popped your phone onto a charging mat, you’ve seen the science in action. It’s cool stuff, and is viable at proof-of-concept scale in cars. Oh, and at a cost of $2m per mile. It’s also not regulated or safety tested at any real scale. We look forward to Tesla’s strategy to get all that done in 2 years or less. Meanwhile, we recommend taking a Waymo if you find yourself in San Francisco anytime soon. 

So… what’s the strategy for Tesla? The Cybertruck is a flop, although the #cyberstuck videos are nearly worth the price of seeing the I’m-not-compensating-why-do-you-ask rolling dumpsters in our neighborhood. They have no compelling products that appear to be launching anytime soon, and the recent event was hilariously effective at transferring their market capitalization straight to Uber. 

We have to wonder…. What would happen if Trump got reelected and slashed what little regulation currently exists in the carbon credit markets? Could Tesla then simply keep selling poorly built cars at close to cost in order to lock those companies that actually care about making profits on their products out of the market, then sell enough carbon credits to stay highly profitable themselves? Signs point to yes. 

The real question, of course, is where the credits end up, and how much damage is done when big business doesn’t have to decarbonize, but can buy offsets from the company that started the EV revolution.

Back to the beginning. 

We started with a question. Is Tesla good for the climate? Two or three years ago, absolutely yes. Now….

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