The Regulatory Roaches In Tesla’s ZEV Credit Soup

In my view, the August 2nd issuance of the joint EPA-NHTSA proposal created enough uncertainty to render Tesla’s accumulated and future ZEV credits worthless until we find out whether California’s ZEV mandate will survive.

One of the first lessons I learned in law school is, “never buy a lawsuit.” The same logic holds true for ZEV credits that will have no value if California’s ZEV mandate is eliminated. While an anemic market for ZEV Credits might continue to exist if a lawsuit instituted by California keeps the ZEV mandate in place while the case works its way through the courts, buyers would be foolish to buy any more credits than they absolutely need, which means that sellers would be unable to move large volumes of credits or command premium prices for them.

Since ZEV Credits accounted for one-eighth of Tesla’s automotive gross margin in 2017 and higher amounts in prior years, I believe the inevitable collapse of the ZEV Credit market will have a material adverse impact on Tesla’s gross margins in 2018 and all future periods.

While last Wednesday’s article described a potential ZEV and GHG banquet for Tesla longs in Q2 and Q4, my discovery of the pending EPA-NHTSA rulemaking is the gustatory equivalent of roaches in the soup.

This morning I closed my Tesla call position and reopened an aggressive put position.

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Disclosure: Put position on TSLA.

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Adam Reynolds 2 years ago Member's comment

Any updates on this?

Bill Johnson 2 years ago Member's comment

Thanks for this important update on $TSLA.