Looking towards our northern neighbor, you might notice a palpable sense of unease, as thick as a knife-slice. It appears that Canada has some reservations about the United States’ trade policies. Meanwhile, U.S. President Donald Trump seems to share similar sentiments regarding Canada.
As a passionate follower, I too have mixed feelings about Elon Musk and his innovative enterprise, Tesla (TSLA), in light of their swift move to apply for incentives before they expired, which left some Canadians raising an eyebrow or two. However, upon further investigation, it appears that the actions taken were legitimate, providing a breath of relief to many supporters like myself.
It appears that Canada and Musk/Tesla have experienced some turbulence in their relationship. However, it could be Canada that ultimately boosts Tesla’s financial prospects.
How’d we get here?
Since its inception, Tesla and its investors have faced close examination concerning how the company earns revenue and profits by selling zero-emission credits. Occasionally, there were jests that Tesla excelled more at selling emissions credits than manufacturing vehicles, but given that these credits accounted for approximately 40% of the company’s profits in 2024, it’s no longer a subject for humor.
Businesses receive credits when they sell Zero-Emission Vehicles (ZEVs), and can optionally sell excess credits to other corporations beyond what they are mandated to hold.
Tesla’s story is taking an unexpected turn as it teams up with Canada. The Canadian administration has set new rules that require 20%, 60%, and 100% of light-duty vehicle sales to be zero-emissions vehicles by 2026, 2030, and 2035 respectively.
In other words, the current market share of Zero-Emission Vehicles (ZEVs) in new Canadian vehicle registrations during the first quarter was 9.7%. It’s challenging to envision this percentage doubling by 2026, especially since EV sales have not grown as quickly as initially expected, and with the unpredictable trade policies and tariffs in North America, where the automotive industry is intricate and spans across Canada, Mexico, and the U.S., making it difficult for ZEVs to gain traction.
Buying credits
If a car manufacturer in Canada is aware that they are likely to not meet the set regulatory goals, what actions might they consider taking to avoid penalties amounting to $20,000 per vehicle?
Instead of producing gasoline-powered vehicles, which would incur penalties, Tesla, a leading electric vehicle manufacturer, can opt to sell some of its surplus zero-emission credits. Last year, these sales brought Tesla $2.8 billion in revenue. Unlike traditional auto industry sales, these credits are considered as pure profit and significantly boost Tesla’s profit margins.
In British Columbia and Quebec, Tesla is currently selling a larger quantity of environmental credits compared to both General Motors and Hyundai combined, as per Automotive News. In fact, Tesla sold approximately 32,000 credits in Quebec between 2020 and 2024 alone.
However, should automakers find themselves unable to meet their set emission goals, and if policies continue to impose penalties on non-compliant manufacturers, there’s a high chance that Tesla will significantly benefit from increased purchases of emission credits.
What it all means
One advantage for Tesla investors to hold on to at this moment is that Canada might be helping Tesla enhance both its revenue and profit margins after several challenges originating from the border. This unexpected development could lead to increased demand for Tesla’s stockpile of zero-emission credits, which is excellent news since the company is striving to recover from a 13.5% decrease in global vehicle deliveries during the second quarter compared to last year.
Although this development offers some positive aspects for investors, it doesn’t significantly alter the overall investment case for Tesla. At present, it could be prudent for investors to hold off on making new investments until the upcoming November shareholder meeting, as this might provide a clearer insight into the company’s future plans and direction in the electric vehicle market.
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2025-07-19 14:56