Tesla (TSLA) has long enjoyed a unique advantage in the auto industry: its ability to rake in billions from selling regulatory credits to rival automakers struggling to meet federal fuel economy and emissions standards. For years, this lucrative stream of “easy money” has boosted Tesla’s profitability. But that era is coming to an end, and the implications for Tesla’s stock are becoming harder to ignore.

The U.S. government’s rollback of clean energy incentives is closing the door on the regulatory credit market that once acted as a financial lifeline for EV makers. For Tesla, the largest beneficiary of the system, this shift represents a turning point. Without the cushion of credit revenue, the company must increasingly rely on its core business performance to deliver profits. That’s a tall order at a time when U.S. EV demand is expected to cool sharply, competition is intensifying, and the company’s own fundamentals are showing signs of strain.

As Wall Street weighs the risks of a post-credit era, investors are left asking a critical question: without the golden goose of regulatory credits, what does the future hold for Tesla stock? Let’s take a closer look.

About Tesla Stock

Tesla is a prominent innovator dedicated to accelerating the global transition to sustainable energy. The Elon Musk-led powerhouse designs, develops, manufactures, leases, and sells high-performance fully electric vehicles, solar energy generation systems, and energy storage products. It also offers maintenance, installation, operation, charging, insurance, financial, and various other services related to its products. In addition, the company is increasingly focusing on products and services centered around AI, robotics, and automation. Its market cap currently stands at $1.04 trillion.

Shares of the EV maker have slumped 20.6% on a year-to-date basis.

Tesla’s Easy Money from Regulatory Credits Set to Dry Up

Tesla and other EV makers in the U.S. are losing a major source of income as the U.S. officially phases out the emissions credit market. In one of my previous articles on TSLA, I discussed the impact of President Donald Trump’s recently signed “One Big Beautiful Bill Act” on the EV maker. The most significant change is the elimination of the federal tax credit for EV purchases effective Sept. 30. Another important change is the termination of penalty enforcement for automakers with lower average fuel economy, essentially, those producing more gas-guzzling vehicles and fewer EVs.

You may be wondering what these credits actually are and why they matter so much to EV makers. 

To reduce carbon emissions, governments worldwide have introduced incentives to encourage automakers to produce electric vehicles. With that, automakers essentially earn credits by producing zero-emission vehicles. All automakers are required to meet the CAFE and emissions requirements set by the federal government. The CAFE requirements have risen steadily year after year since 2010, reaching 49.2 miles per gallon in 2024. Carmakers that didn’t meet this requirement could purchase credits from those that generate a surplus. Since EV makers produce only zero-emission vehicles, they generate surplus credits that can be sold. In other words, Tesla and other EV makers were effectively subsidized by automakers that bought their regulatory credits to keep producing gas-guzzlers such as pickups and SUVs while avoiding U.S. government fines. Buying credits was cheaper than paying fines.

Regulatory credit revenue has served as a strong profit driver for EV makers, particularly Tesla. This is because revenue from regulatory credit sales goes straight to the bottom line, thus boosting EV makers’ profits. It began on a small scale, but as Tesla produced more vehicles, it accumulated a significant number of credits that could be sold to other automakers. Over time, hundreds of thousands in revenue grew into millions, and millions eventually grew into billions. According to FedScout, Tesla has generated $12.24 billion in revenue from the sale of “automotive regulatory credits” since 2015. However, the passage of the OBBBA ended Tesla’s golden goose.

The Wall Street Journal recently reported that Tesla’s peers Rivian (RIVN) and Lucid (LCID) have faced difficulties obtaining the necessary paperwork from the National Highway Traffic Safety Administration (NHTSA) to finalize zero-emission credit deals. Notably, a week after Trump signed his megabill, NHTSA informed automakers that it would postpone issuing the annual compliance notifications for the Corporate Average Fuel Economy (CAFE) standards. An NHTSA spokesperson told the WSJ that the agency will resume issuing compliance letters once it completes its review of the CAFE standards. However, there is considerable doubt that this will occur under the Trump administration. With that, this effectively ends the market for credits under the CAFE standard, since automakers no longer need to buy credits after the Trump administration officially removed penalties for noncompliance.

Meanwhile, the Zero Emission Transportation Association (ZETA), an EV industry trade group, filed a petition with the U.S. Court of Appeals seeking to compel the NHTSA to resume issuing the letters. Christopher Nevers, Rivian’s director of public policy, stated in the petition that the company cannot finalize its credit deals because NHTSA stopped issuing compliance letters, leading to a $100 million revenue loss. Rivian no longer anticipates receiving any CAFE credit revenue this year. In a separate statement, a Lucid executive noted that the credits “represent a significant share” of the company’s revenues. As the largest EV maker in the U.S., Tesla is set to face greater revenue losses than its smaller rivals. 

Over the past four quarters, Tesla generated nearly $2.5 billion in regulatory credit revenue, which made up a notable share of its net income during the period. Those figures represent global regulatory credit revenues, and while Tesla doesn’t specify how much originates from the U.S., analysts estimate that up to half comes from its U.S. sales. Moreover, William Blair analysts estimated in July that roughly 75% of Tesla’s credit revenue is derived from CAFE standards. In its latest quarterly earnings report, Tesla said revenue from regulatory compliance credits dropped to $439 million, down 26% from the prior quarter and 51% year-over-year. The EV maker also said that the repeal of U.S. federal regulatory credit programs led to a $1.11 billion drop in expected revenue and cautioned that future revenue could be heavily impacted by the changes. “While we’ve never planned our business around such sales, it will nonetheless impact our total revenues going forward,” Tesla CFO Vaibhav Taneja said on the company’s Q2 earnings call.

It is now clear that the end of the regulatory credits system will have a significant impact on Tesla’s profits. Although Tesla hasn’t needed these credit sales to remain profitable for years, its dependence on them has clearly increased in recent quarters, particularly as sales have declined in recent months. William Blair analysts warn that the loss of regulatory credit revenue will “result in a direct hit to profitability” and expect demand to drop by about 75% in 2026 before disappearing entirely in 2027. “The elimination of the CAFE fines requires a reset in expectations,” the William Blair analysts said in a note. Separately, analyst Troy Teslike projects that the U.S. rollback will cut about $255 million from Tesla’s revenue each quarter, over $1 billion annually moving forward. Some analysts are even more doubtful about Tesla’s outlook without regulatory credit sales. Gordon Johnson, an analyst at GLJ Research, said, “These regulatory credit sales are the reason that Tesla exists today. Without regulatory credit sales, Tesla loses money in its core business.”

Putting it all together, with the credits gone, Tesla will now have to rely entirely on its actual sales performance for its income. Even more troubling, with the $7,500 EV tax credit set to end in September, EV sales in the U.S. are expected to collapse. On the Q2 earnings call, Musk warned that Tesla could face “a few rough quarters” due to the end of EV subsidies, and now it’s clear those quarters will indeed be very rough.

What Do Analysts Expect for TSLA Stock?

Wall Street analysts remain divided on Tesla, as the stock holds a consensus rating of “Hold.” Of the 42 analysts covering the stock, 12 give it a “Strong Buy,” two a “Moderate Buy,” 18 suggest holding, and 10 rate it a “Strong Sell.” Bulls are largely encouraged by Musk’s promises on artificial intelligence, robotics, and self-driving technology, while bears highlight the company’s weakening fundamentals and toxic brand image. Notably, the stock currently trades at a premium to its average price target of $299.28.