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As the market for electric cars heats up—in 2011, about 18,000 electric vehicles were sold in the U.S., up from just under 500 in 2010—a new opportunity is emerging for carmakers: selling “credits” required to meet clean-air rules. This year, California begins stepping up the number of zero-emission vehicles, such as electric and hydrogen-powered cars, automakers must sell in the state. Companies that can’t meet their quotas can buy credits from rivals that exceed their targets. “We are in a fortunate position of having positive credit, so [selling them] is obviously something we are able to look at,” says Andy Palmer, an executive vice president at Nissan, which has earned surplus credits from sales of its Leaf, the top-selling all-electric car in the U.S.
Tesla Motors (TSLA) has revealed in corporate filings that it’s sold $13 million worth of credits to Honda (HMC) and at least one other automaker it hasn’t identified, though the company declines to say how many it sold or the price paid.
The number of credits per vehicle depends on its range and how fast it recharges. A model with a 100-mile range and standard charging, such as a Leaf or electric Ford (F) Focus, would generate three credits, while a long-range, fast-charging Tesla Model S is worth seven. Under California’s air-quality rules, automakers that fail to earn (or buy) enough credits face fines or even a ban on selling cars in the state.
Each credit can help an automaker avoid thousands of dollars in fines. While deals are made privately and companies don’t like to reveal prices, credits sell for $5,000 to $10,000 each, according to two people in the auto industry who declined to be identified talking about private negotiations. So in addition to the $70,000 sticker price of each top-line Model S it sells, Tesla could bank another $35,000-plus in credit sales to other manufacturers. “We think there’ll be growing demand for the vehicles, and it’s a framework to get them to customers,” says Dave Clegern of the California Air Resources Board, which runs the ZEV program.
From 2012 to 2014, California will require that about 2 percent of cars sold by automakers with annual sales of at least 60,000 vehicles in the state be zero-emission. That share will rise over time, reaching 15 percent in 2025. In 2018 the rules will be extended to apply to companies that sell more than 20,000 vehicles in the state, about a dozen automakers. Smaller manufacturers like Tesla that aren’t subject to the regulations can still bank and sell credits.
The rules affect auto sales in 11 other states—including New York, New Jersey, and Massachusetts—that follow California’s lead. Regulators expect the six largest carmakers to sell a combined 60,000 zero-emission autos in those 12 states through 2014, and a cumulative total of 1.4 million by 2025. The burden is heaviest for Toyota Motor (TM), which has the largest market share in California, followed by Honda, Ford, and General Motors (GM).
Honda’s line-up ranks among the most fuel-efficient in the U.S., yet the company faced a credit shortfall in California because it sold fewer FCX Clarity fuel-cell sedans than it planned. While Honda bought Tesla credits from 2008 to 2010, the company says it’s not planning any further purchases because this year it expects to introduce an all-electric version of its Fit compact and a plug-in Accord sedan.
Companies with credits to spare may be eager to sell them soon because any earned from 2009 through 2011 begin to lose value after three years. Those issued from 2012 onward don’t expire, encouraging carmakers to try to sell more clean models than required. The question, says James Lyons, an analyst at Sierra Research and a former California state air-quality engineer, is whether drivers actually want zero-emission vehicles. Though sales are picking up, he says, they’re “still a far cry from the levels the regulations will require.”
The bottom line: Some automakers are paying $5,000-plus to buy credits earned by rivals for selling cars that meet California clean-air standards.