The House is trying to kill Tesla’s EV credits. What happens next.

It was a small step, but the EPA and California car regulations are significant watch items for Tesla investors. The current regulatory regime is a key part of Tesla’s ability to make hundreds of millions from selling zero-emission vehicle credits.

On Thursday, House lawmakers voted to nullify the “waiver of preemption” for its “Advanced Clean Cars II” regulations, which the Environmental Protection Agency had posted in January.

Essentially, the EPA waiver grants California the right to regulate its own air quality, pre-empting federal standards. California has been doing that since the late 1960s.

The waiver related to California’s new ACC II standard that mandates zero-emission vehicles and plug-in hybrids make up 100% of new car sales in the state by 2035.

That’s a tall order despite a lot of progress. Zero-emission vehicles accounted for about 25% of the new vehicles sold in the state during the first half of 2024. (Zero-emission vehicle sales accounted for about 8% of 2024 U.S. new car sales.)

The fast pace of EV adoption is one reason the lobbying group Alliance for Automotive Innovation praised the decision. “Repealing gas vehicle bans in California…is among the most important policies to restore some balance to vehicle emissions regulations,” said John Bozzella, CEO of the Alliance, in a Thursday news release. “And to ensure customers remain free to choose the type of vehicle that works for them and their family.”

California, along with states following its rules, accounts for about 30% of the total U.S. new car market.

The House resolution would need Senate approval and the president’s signature to become law. And then it would face legal challenges. California’s Air Resources Board didn’t immediately return a request for comment, but it will regulate the state’s air quality for a while yet.

That’s good news for Tesla. California regulations are a big part of its regulatory credit sales. Auto makers that don’t sell enough zero-emission vehicles can buy credits from companies that do. Tesla always has excess credits because it only sells zero-emission vehicles. Barron’s reached out to Tesla for comment.

What a credit is worth is a closely guarded secret and not easy to figure out. Auto makers, for instance, aren’t being fined today by California, but they can stockpile credits for later years. Tesla generates credit sales outside of the U.S. as well.

The EV maker has generated about $2.9 billion in credit sales over the past 12 months. Making some assumptions for the zero-emission credits Tesla was required to sell around the globe, a credit might have been valued at $2,000 to $3,000 a car. Credits appear to be getting more valuable as emission standards tighten.

Tesla has about $4.6 billion in credit sales over the past two years. Sales are a helpful ballast in tougher times. In the first quarter of 2025, Tesla’s $595 million in credit sales exceeded its $399 million reported net income. Tesla’s car business would have lost money in the first quarter without the credits.

Profit is, obviously, one reason credits should matter to Tesla investors. That $4.6 billion also represents cash Tesla can use to invest in its AI ambitions, such as humanoid robots and self-driving cars.

Coming into Monday trading, Tesla stock was down 9% year to date, while the S&P 500 was off 3%.

Write to Al Root at [email protected]