Tesla openly admitted to ZEV credit sales in an interesting 2008 letter to the Air Resources Board

Photo courtesy Tesla Motors

Tesla Motors has released a pile of documents to the SEC in preparation for their upcoming IPO. Several sources are reporting today that the IPO date has been set for June 29, 2010 and that Tesla is hoping for a $1.4 billion valuation of the company. The documents have been a gold mine of business details and insight into Tesla's operations and business health. One of the nuggets uncovered has been knowledge that Tesla has been selling ZEV credits to Honda. It turns out however that Tesla has openly discussed ZEV credit sales at least as early as 2008.

These credits are issued by the California Air Resources Board (CARB) as an automobile manufacturer makes and sells certain kinds of qualifying vehicles. These credits are for the ZEV mandate passed into law in the early 1990's and are the way of measuring whether the manufacturers are in compliance with the ZEV mandate. Even in its current relatively neutered state the automobile manufacturers have to take some action to earn ZEV credits to satisfy the ZEV mandate. Partial credits are awarded for hybrid cars, or for neighborhood electric vehicles, for example. On the other hand mega credits are earned for fuel cell cars, and the credits earned for battery electric vehicles are less than the credits earned for fuel cell vehicles.

The basic idea of earning a ZEV credit is it offsets sales of the polluting gasoline or diesel powered vehicles sold by most manufacturers. If, however, a given manufacture has steadfastly spoken against battery electric vehicles, instead speaking highly of fuel cell vehicles, and at the same time fuel cell vehicles are not ready for mass market sales, how is such a manufacturer (Honda) to earn enough ZEV credits? This is free market capitalism at work. Tesla has something it cannot use itself, something that Honda wants, and CARB is allowing the transaction to take place. Indeed after a short bit of online searching one quickly learns this sort of transaction was designed into the system. For example, the New Jersey Low Emission Vehicle program includes provision for a "ZEV Credit Bank" through which manufacturers may "acquire from other manufacturers credits for certain qualifying vehicles" which they "may use the credits to offset the ZEV sales requirements of the LEV program." Likewise the CARB ZEV Tutorial published in June of 2009 clearly discusses sales of ZEV credits between manufacturers.

The revelation in Tesla's IPO documents set off a flurry of discussion and speculation. For some it was a shock that Tesla was even allowed to do it. Are they forgetting the similar ideas of trading emissions credits "Cap and Trade"? While the ZEV mandate is not technically a "cap and trade" system, it is has a similar purpose. Others suggested these sales explain why Honda has been so slow to develop a plug-in hybrid or battery EV. Because of ZEV credit purchases they don't have to actually produce the ZEV's themselves, they can sponge off Tesla's efforts.

A blog post dated August 2008 by then- Tesla CEO Ze'ev Drori is an open letter to Gov Schwarzenegger, various state Assembly members, and the Air Resources Board discussing the ZEV credit program and openly discussing Tesla's sales of their ZEV credits to large vehicles manufacturers (LVM). The subject of the letter is a CARB decision on March 27 2008 to further neuter the ZEV Mandate by lowering the required number of ZEV's during phase III of the program (the years from 2012 to 2015). Lowering the ZEV requirement from 25,000 vehicles to 7,500 was, Tesla said, an "absurdly low number given the developments in the EV space." Indeed recent announcements by Nissan and other companies surely demonstrate that 7,500 vehicles is absurdly low if only due to Nissan's planned production levels.

The letter is interesting considering the events since then. The Aug 2008 date on the letter puts it before the financial meltdown of 2008-9 and smack in the middle of the crisis of high gasoline prices where seemingly everybody was scrambling to find more fuel efficient transportation.

The letter states it is well documented that "the Board was misguided into an erroneous conclusion by a faulty fact finding process" that led them to conclude "no electric car will be commercially available until 2012." Looking back on that statement we can only say it was very prescient. Tesla has indeed sold over 1,000 electric cars, is well along on their plans to manufacture the Model S (admittedly under a delayed schedule) and several other manufacturers including Wheego, Coda, Nissan, Mitsubishi, GM and Toyota are clearly planning to sell ZEV's or PHEV's in the U.S. before 2012. The sales levels seem likely to exceed 25,000 vehicles so, as Tesla's then-CEO asked, "Whose interest will be served by easing the requirements to a paltry 7,500 vehicles?"

The other core bit in the article is a highly technical plea to change the "carry forward provisions" of the ZEV credits earned by "pure ZEV manufacturers". The argument was that because ZEV credits expire 3 years after the manufacturing year of the car being manufactured, the ZEV credit is highly perishable. The letter calls for a rule change that would change the accounting on the ZEV credits to make them less perishable.

This sort of story is demonstration of why some say emissions credit trading is a modern form of the Indulgences sold by church leaders during medieval times. Supposedly sinners are doomed to eternal damnation in lakes of fire and brimstone (an analogy to global warming?) and during medieval times rich people were allowed to make up for their sins through purchasing indulgences, much like todays corporations are allowed to make up for their pollution through purchasing emissions credits. Whatever benefit there is for Tesla to be selling ZEV credits to Honda a practical result is that Honda did not experience the full weight of incentivization under the ZEV mandate.

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