Tesla doesn’t make money building cars. They make a little money on energy generation. However, as Andrew Ross Sorkin of the New York Times pointed out during our COVID summer, Tesla makes a lot of money in selling GreenHouse Gas (GHG) Emission Credits to other automobile manufacturers. In fact, Tesla made so much money from those credits that it drove their last four quarters.
Or to quote from the “Dealbook” newsletter written by Andrew Ross Sorkin and Michael J. de la Merced:
“Tesla sold around 91,000 vehicles in its latest quarter, down 5 percent from the same time last year. Its profits were hugely lifted by sales of emissions credits to other automakers, which were nearly four times higher than in the same quarter last year.”
So, to reiterate, a company that is most famous for making cars and building solar panels generated a significant portion of its profits from selling GHG Emission credits. Or put differently, larger automobile companies like Ford, GM, BMW, Nissan, Renault and Fiat are paying Tesla as a punishment for their inability to ramp up their production of non-fossil fuel cars.
For me, this notion shows that Tesla is an interesting company; but it is not the behemoth that many including Social Capital CEO Chamath Palihapitiya claim that it is. Rather, Tesla is more like a “Fairchild Semiconductor”, or an “IBM”, or a “Hewlett-Packard”, a “GE” or a “Bell Telecom”, or a “Raytheon” or a “Honeywell”. In mentioning those companies, one might think I am talking about those companies’ sizes. However, that would be wrong. The most interesting characteristic about the companies in question was not their size; but, it was the effect that they had on technology. IBM and GE have been both big and small, but their most interesting feature was the “Research and Development (R&D) that they accomplished. For, they pursued and accomplished the hard task of developing the R&D which built the modern American Economy. IBM’s development of computer technology helped the Americans to leap ahead of the British in the development of computers. Fairchild Semiconductor and Hewlett-Packard – coupled with a donation of land from Stanford University – famously spawned “Silicon Valley”. Consequently, Tesla should not be looked at as a company who will change the world by its actions. On the other hand, look at it as a spark or a catalyst.
Like many military or aircraft manufacturers, Tesla is a company which takes advantage of governments and their priorities. Don’t forget that Tesla’s first large break was a loan from the
Obama Administration. The intent of the loan was to spark change in the American auto industry and Tesla was more than happy to accept the challenge. Tesla has also received huge tax breaks from jurisdictions in Texas to build a new plant there and this is only the beginning. Tesla has built banks of batteries in Southern California, Hawaii, New Zealand, in the UK and on several Pacific islands to smooth out private and public electrical grids. In fact, their most recent success has been the launching of a 100 Megawatt battery to help Australia. Accordingly, Tesla is very good at solving government and governance issues in the field of energy and electrical generation which otherwise scare established stakeholders like companies and politicians.
The only problem for Alberta is simple: Tesla’s solutions generally decrease the need for Alberta’s traditional commodities: coal, natural gas and oil. So, the issue is not the size of small Tesla’s manufacturing arm, but the ingenuity of their solutions. By building both large and small parts of a new 22nd century energy grid, Tesla is making it easy for governments to set new ambitious standards. This in turn pushes legacy companies. Ford, GM, BMW, Nissan, Renault, Volvo, Fiat et al. are increasing their fleet of hydrogen and electric cars; while Utility companies & Battery manufacturers are competing with Tesla to install home batteries and solar panels to power one’s home. This is bad for Alberta. However, it does get worse.
Let’s just take the case of cars. If Legacy Automakers are able to catch up, they will permanently shrink the space for petroleum powered cars (including gas, petrol, natural gas and diesel). If Legacy Automakers are not able to catch up, Tesla will be paid handsomely in either technology royalties or GHG emission credits to fill in the gap. In the latter case, while the shrinkage will be slower, it will be no less devastating because Tesla’s warchest will expand. Much of this logic can also flow into other markets where Tesla competes. Which all means one thing: a drop in demand for Alberta’s exports.
If one needs more convincing, think about the development of the iPhone’s “Gorilla Glass”. Corning Glass was asked by Steve Jobs and Apple to develop a new type of Glass for its breakthrough technology called the iPhone. Up until 2007, Apple had not developed a phone. Nortel, Lucent and Alcatel were the dominant architectural players in the telecom world; while companies like Samsung, Nokia, Motorola, Ericsson and Blackberry were the dominant cellphone players. Large players like Microsoft could not break into the mobile phone market place. Yet, with a new type of glass and a new way of imagining phones, Apple changed the way the world was connected. Nearly a decade on, the post iPhone smartphone has not changed, Apple is still one of the five biggest cellphone brands and we cannot imagine any other outcome.
“Gorilla Glass” was a small change for Corning, yet it changed the world for everyone else. Tesla may not become a manufacturing powerhouse; but through its various products – a Home Battery, Solar Roof, Solar Panels and cars – Tesla is creating sparks all over the place; and that is the problem for Alberta. Or think of it this way, Tesla is providing the foundational ability for California to move forward with a novel idea: reducing the need for the internal combustion car and elimination of natural gas hook-ups in new homes and new communities.
Very few public policy analysts in this province are noticing those sparks because they are so small; and, at this time, there are not enough sparks now to make a difference. However, as we learned in 2008, and onward, it doesn’t take much to change the fortunes of Alberta’s fossil fuel producers. California, for example, now has a mandate that requires homebuilders to put solar panels on roofs. While, in 2019, Berkeley, California became the first US city to ban natural gas hook-ups in new buildings. As Tesla helps to develop the technology to allow for this change, it will not be long before oil and natural gas consumption plateaus or falls.
Think of it this way. Right now, fourteen States and the District of Columbia follow California’s lead on vehicle emissions. While the Trump Administration has tried to roll back California’s traditional power to set higher emission standards, it has not been able to. With the possibility of a Joe Biden Presidency just around the corner, it is reasonable to say that higher emission and gasoline efficiency standards are on the way. Tesla will get more money from legacy automakers because of it and newer technology will come our way. So, the truth is coming to our door and we should be responding to it. Alberta is going to be hit by lower demand for our chief export products: coal, natural gas and bitumen. We need to change now so that our economic future can be secured. This move is in the interest of all of us and the Leg needs to be ready to act.