Thursday, May 23, 2013

How taxpayers subsidized Tesla to make the rich richer

The Other Government Motors

Tesla by the numbers: How taxpayers made an electric car company.

WSJ.COM 5/24/13: The list of the Obama Administration's industrial policy failures is long, from Solyndra to Fisker Automotive. But now we are hearing that one success redeems them all: Tesla Motors . Tesla's share price has soared this year on rave reviews for its electric car, growing sales and its first quarterly profit.
Rarely noted is how much this profit is a function of government subsidy and coercion. So let's take apart Tesla by the numbers, if only to give our reader-taxpayers a better sense of what they've paid to make Tesla's owners rich.
The decade-old Tesla debuted its first product, the Roadster, in 2006. With a base price of $109,000, it was discontinued before it hit 2,500 sales. Tesla introduced its Model S a year ago and had sold an estimated 9,650 at a bargain $70,000 through April. By contrast, Ford sold 168,843 F-series pickup trucks in the first quarter alone.
Tesla wouldn't have sold even that many cars without the extraordinary help of government. In 2009 the company received a $465 million Obama loan guarantee, supplemented last year by a $10 million grant from the California Energy Commission.
That money has underwritten Tesla's engineering and manufacturing, but federal and state governments also subsidize the purchase of Tesla products. Any U.S. buyer of a Tesla car qualifies for a $7,500 federal tax credit, while states like Colorado throw in up to $6,000 more in state income-tax credits. Taxpayers pay first so Tesla can build the cars and again to help the wealthy buy them.
These subsidies are important enough to Tesla that its website features an "Incentives" section directing buyers where to look for their states' electric-vehicle benefits—rebates, free parking, exemptions from state sales tax, use of high-occupancy lanes, and the like. Buyers from states that offer no incentives get this Tesla message: "Want to help make EV [electric vehicle] incentives a reality in your area? Encourage your local or state representative by calling or sending them a letter."
Tesla's biggest windfall has been the cash payments it extracts from rival car makers (and their customers), via its sale of zero-emission credits. A number of states including California require that traditional car makers reach certain production quotas of zero-emission vehicles—or to purchase credits if they cannot. Tesla is a main supplier.
Morgan Stanley report in April said Tesla made $40.5 million on credits in 2012, and that it could collect $250 million in 2013. Tesla acknowledged in a recent SEC filing that emissions credit sales hit $85 million in 2013's first quarter alone—15% of its revenue, and the only reason it made a profit.
Take away the credits and Tesla lost $53 million in the first quarter, or $10,000 per car sold. California's zero-emission credits provided $67.9 million to the company in the first quarter, and the combination of that state's credits and federal and local incentives can add up to $45,000 per Tesla sold, according to an analysis by the Los Angeles Times.
One irony is that rival car makers—even those making electric hybrids or gasoline subcompacts—don't get the same benefit from zero-emissions mandates. As environmentalist Bjorn Lomborg notes, manufacturing and charging electric cars over their life cycle can produce more carbon than small, gas-powered vehicles. Yet Tesla is cashing in because of the policy bias for fully-electric cars.
Another irony is that the main beneficiaries of this electric-car largesse belong to—well, the 1%. Tesla co-founder Elon Musk is already a successful entrepreneur, and his estimated net worth has soared past $4 billion thanks to the IPOs of Tesla and Solar City (a separate operation that received a $344 million federal loan guarantee).
Also realizing Tesla IPO windfalls are the elite of Silicon Valley venture capital: the Westly Group (whose principal, Steve Westly, is an Obama campaign bundler), Draper Fisher Jurvetson, and VantagePoint Venture Partners. Other paupers in the Tesla venture include or have included Daimler, Fidelity Investments, Google co-founders Sergey Brin and Larry Page, Hyatt heir Nick Pritzker, and former eBay president Jeff Skoll. The state-owned Abu Dhabi Water & Electricity Authority last year booked a $113 million profit selling its share of Tesla. You're welcome.
Tesla isn't oblivious to the politics of all this, and on Wednesday it said it had fully repaid its government loan. That's good, since Tesla's long-term prospects are far from certain. The major auto makers will soon have their own zero-emissions vehicles, which Mr. Musk says will end Tesla's credits boom by year end. Analysts are also warning that Tesla has yet to show it can sell its very pricey car to a mass market.


Tesla's investors claim this taxpayer support is worth it if it creates a new electric-car company, and for them it is. But such a success must still be measured against other taxpayer losses and misallocated capital.
And even if Tesla's cars do sell, the policy question is why billionaires in California couldn't have financed the business themselves. Why should middle-class taxpayers whose incomes are falling still pay to subsidize the purchase of cars that only the affluent can afford, and then partly as a gesture of their superior environmental virtue? When does the rest of America get its return on Tesla's profits?


  1. I think people should consider pretty much only the local air quality issue when evaluating EVs. Southern CA air quality is bad enough to require many interventions, so driving an EV and even subsidizing it there, makes sense. Not so in many other places. Don't care about the CO2 effects - too hard to calculate. EVs move pollution from the inversion of the LA basin to other places (generation site and downwind). Spreading the pollution, but reducing the concentration in LA metro area.

    1. Very good comment. This is one benefit I have not heard before.

  2. Yes, creating the batteries does have CO2 impact. Yes, charging them does as well. That's not the point. The point is to increase awareness of electric cars. Government incentives create competition in the EV market, and there is a massive push, now more than ever, in R&D funding. There will be breakthroughs in battery tech that will allow batteries to be produced in a way that does not have a negative impact on the environment. Charging the car only creates CO2 because of burning coal for electricity. If a Tesla owner chooses to install solar panels on the roof of his or her house, then charging it does not put any CO2 into environment.

    As a company Tesla paid off everything the Obama administration gave them 9 years early. Tesla is a private company that owes nothing to America, but will nevertheless create jobs and foster innovation. Tesla is a growing company that has plans to make a sub-40k, middle class electric car and the gigafactory will help them realize this goal. Without government loans they would be years behind where they are now