Biden’s new rules for tailpipe emissions, which the Environmental Protection Agency proposed on April 12, would sharply limit the pollution cars are allowed to emit for model years 2027 through 2032. If ultimately adopted, in whole or in part, the new rules would effectively force automakers to build far more electric vehicles and far fewer gasoline-powered ones.
That could cause upheaval at many automakers trying to shift from gas-powered cars to electrics at a measured pace that doesn’t wreck their profitability. For Tesla, (TSLA) however, it will be business as usual — except that the competition could end up hobbled by massive new costs, plus the stumbles that often attend large corporate transformations. That makes Tesla the single-biggest beneficiary of the EPA’s new effort to slash auto-related emissions.
Ironies abound. Musk and Biden have feuded over labor unions, which Biden considers a key constituency and Musk loathes. When highlighting the rollout of EVs, Biden typically touts new efforts at Ford (F) and General Motors, (GM) which are unionized, while ignoring Tesla, which is not. Yet Tesla is the undisputed leader in EV sales in the United States, with 65% of the US EV market and vastly more sales in the category than Ford, GM or any other automaker.
Musk got so irritated by Biden’s dismissiveness that in January 2022 he called Biden a “damp sock puppet” on Twitter. Later that year, Musk said he had a “super bad feeling” about the economy, and at a Biden press conference a reporter asked Biden for his response. “Lots of luck on his trip to the moon,” Biden quipped, referring to Musk’s hopes for space travel on one of his Space X rockets. Musk continued to tweak Biden on Twitter, and right before the midterm elections last year, Musk advised his 134 million Twitter followers to vote Republican.
Democrats, however, are better for his car company. Musk and Tesla deserve credit for foreseeing the electrified future and persevering through near-death experiences. But they’ve had some help. The electric-vehicle tax credit that helps subsidize the cost of an EV originated in a 2009 law passed by Democrats and signed by President Obama. That tax break helped goose Tesla’s sales during difficult years when it lost money and needed every penny. President Trump wanted to kill that tax credit, but wasn’t able to.
Tesla has also benefited from regulatory credits in California, largely governed by Democrats. California gives Tesla credits for producing zero-emissions vehicles that it can sell to other companies who use them as a pollution offset. Such sales have netted Tesla hundreds of millions of dollars.
The new rules would raise industry-wide costs by somewhere between $180 and $280 billion during the seven-year period, according to the EPA. There would be savings, too, such as better fuel economy for drivers and reduced maintenance for EVs, compared with gas-powered models. But manufacturers largely bear the costs up front, then pass on to consumers what they can through higher prices.
The Biden administration’s new pollution rules could force the biggest transformation of the auto industry in its history. The EPA estimates that if the rules go into effect as proposed, EVs as a portion of new-car sales would rise from less than 6% now to around 67% by 2032. That would be a remarkable shift for just a 10-year period.
All of Tesla’s assembly lines produce EVs. At other automakers, EVs are a tiny share of production, even with sizable new commitments to electrics. It costs billions of dollars to build an automotive assembly line, and more to retire old ones no longer in use. Legacy automakers face massive transformation costs. Tesla doesn’t.
Since 2019, North American automakers have announced roughly $80 billion worth of new investments in electric vehicles. The EPA argues that a rapid transition to EVs will happen no matter what, given the industry’s own large investments in that direction.
The new EPA rules, however, would still impose new costs on top of investments automakers already have planned. The new rules would raise industry-wide costs by somewhere between $180 and $280 billion during the seven-year period, according to the EPA. There would be savings, too, such as better fuel economy for drivers and reduced maintenance for EVs, compared with gas-powered models. But manufacturers largely bear the costs up front, then pass on to consumers what they can through higher prices. That’s the tricky part for legacy automakers: financing the transition to electrics without racking up losses or too many sell recommendations on their stock.
Ford and GM stock has been largely range-bound for years, with the exception of a modest run-up during the Covid rally, when monetary stimulus goosed the whole market. Those flattish stock trends reflects Wall Street worry about massive transformation costs. Tesla, of course, is a high-flier that’s still worth six times as much as GM and Ford combined, even with its stock down by more than half from its 2021 peak. Investors think Tesla is poised to dominate an industry driven by EVs, and that dominance could come sooner if the Biden rules stick.
They may not.
Automakers seem sure to challenge the new proposal, saying they can’t shift to EVs that fast. So the final rule could be weaken that the proposal. There will probably also be litigation challenging the Biden administration’s authority to make such a big change—without Congressional legislation. The current Supreme Court, with a 6-3 conservative majority, has been much more skeptical of executive-branch authority than in the past, and there’s a chance they could block such dramatic changes. A final risk to the new rules is a possible change in administration in 2024, with a future Republican president likely to roll back the Biden standards.
All of those risks add up to a lot of uncertainty for legacy automakers already unloved by the market. CEOs of those companies have to plan for a future where the pace of transformation could range from challenging to ruinous. Tesla has challenges, too, but the burden of stringent pollution regulation isn’t one of them.
Maybe Biden and Musk should be a little friendlier toward each other.