At the beginning of the second Trump administration, when Elon Musk was just beginning to slash federal programs and fire thousands of government workers, his electric vehicle company Tesla reported that its 2024 revenue from car sales fell by 8% in 2024, compared to the year before.

But another, smaller revenue stream rose by 54% — sales of regulatory credits. Those credits, issued by governments around the globe, have played a key role in the development of electric vehicles and in the growth of EV companies, especially Tesla.

Here’s why they exist: Some governments want people to eventually drive cars and trucks that don’t run on gasoline. These governments include California’s, which set a goal in 2020 that will require all new passenger cars and trucks sold by 2035 to be “zero-emission vehicles” or plug-in hybrids. 

To meet that goal, California gives automakers credits for each zero-emission vehicle they sell in the state. Right now, apart from a small number of cars powered by hydrogen fuel cells, those are mostly electric vehicles. The farther a car can drive on a single charge, the more credits it gets.

Each company has a quota of credits it needs to hit every year. But not all of them sell enough EVs to meet their mark. So when a car company falls short, it has another option.

“It has to buy credits from another automaker that has exceeded its quota,” said Pavel Molchanov, an analyst at Raymond James. That means “traditional” car companies “are going to be paying for the credits from the pure electric companies.”

Those “pure electric companies” are primarily Tesla, and more recently, Rivian. They generate lots of surplus credits because they only make electric vehicles.

California is not the only place where carmakers get credits like this. About a dozen other states follow its emissions rules. The Environmental Protection Agency has a similar system for vehicle emissions and fuel efficiency, and so does the European Union.

Add up all the credits accumulated from those markets, and selling the excess to traditional car companies is a pretty easy way for Tesla and Rivian to make money. It’s a lot easier than building a car.

With all the material that goes into a car, the profit margin is “only like 15%, let’s say,” said Tom Narayan at RBC Capital Markets. “But with a regulatory credit, it is 100% profit.”

That’s because the overhead needed to generate and sell credits is extremely low, Narayan said.

So historically, credits have been one of Tesla’s biggest sources of profits, said Seth Goldstein, an equity strategist at Morningstar. Especially in its early years, regulatory credits helped the carmaker stay afloat.

“When Tesla’s underlying business was still unprofitable, it often used the credits as a way to bridge the gap to profitability,” Goldstein said.

Now Tesla’s profitable, so it’s using credit revenue to offset discounts on its cars, according to Narayan at RBC. 

Rivian, meanwhile, is still losing money on its electric trucks and SUVs, so selling regulatory credits is helping keep it afloat. 

Neither company responded to requests for comment.

But both could stand to gain in the years ahead, as California gets closer to its goal of phasing out gas cars by 2035.

“Credit prices are going to start going up if these regulations stay in place,” said Daniel Sperling, director of the Institute for Transportation Studies at University of California, Davis. He helped create the current regulatory credit system when he was a member of the California Air Resources Board.

The future of these regulations is an “if,” because the Trump administration is pushing to revoke a federal waiver that allows California to set its own vehicle emissions rules. 

But car companies will keep moving toward electric vehicles anyway, Sperling said.

“Even if you gutted the requirements in California, these companies can’t afford to sit on the sideline with EV technology,” he said. “They’ve all acknowledged this is the future.”

Because, he said, battery technology, vehicle range and charging infrastructure are all improving. That’s thanks in large part to innovations made by Tesla. And Tesla has been able to innovate, Sperling said, because it’s had financial support from selling regulatory credits.

“Tesla would’ve gone bankrupt without these regulatory credits,” he said. 

And that, he said, would’ve slowed down the automotive industry’s transition to EVs.