EVs Driving the Stock Market

Article by Ethan Kruteck.


A secondary market for regulatory tax credits is the secret to Tesla’s recent success. In September of 2020, Tesla reported being profitable for the past four consecutive quarters, which can be attributed to the sale of regulatory tax credits to automobile manufacturers who were unable to meet the quota (Higgins, 2020). These regulatory tax credits exist because of government incentive programs designed to encourage the manufacture and purchase of electric vehicles. How do regulatory tax credits affect the financial performance of firms such as Tesla? 

The government created incentive programs to transition the transportation industry to be more environmentally friendly. Government incentives related to electric vehicles are offered to both automobile consumers and manufacturers. Under Governor Gavin Newsom, Tesla and other major automobile manufacturers must ensure that 100% of the vehicles they sell are ZEVs by 2045 in the state of California. Each manufacturer receives electric vehicle tax credits for each electric vehicle listed for sale under the Zero Emission Vehicle (ZEV) regulations put in place by the California Air Resources Board. 

If an individual manufacturer does not meet the quota for ZEV tax credits in a given year or quarter, they are able to purchase ZEV credits from other manufacturers that are holding an excess, such as Fiat Chrysler Group buying ZEV credits from Tesla. The transferability of ZEV credits has created a market of buyers and sellers for regulatory tax credits. This permit market is becoming an important aspect of profitability in the automobile industry. Electric vehicle manufacturers such as Tesla have incorporated another revenue stream into their business model.



To answer the question of how these tax credits affect stock price volatility, we performed a regression analysis relating ZEV credit balances to stock price volatility among automobile manufacturers. Using a panel data set spanning from 2009 to 2017 with yearly values of stock price volatility and ZEV credit balances for major automobile manufacturers, a fixed effects regression model was used to perform the analysis. The data were compiled from automobile sellers’ financial statements and ZEV credit data from the California Air Resources Board. The results illustrated in the interactive graph above show that as regulatory tax credit balances increase, stock price volatility falls. The graph includes stock price volatility and ZEV credit balances of major automobile sellers and multiple automobile related companies used for baseline comparison. Looking at each seller, it can be seen that when ZEV credits begin to increase, stock price volatility begins to decline. The negative correlation between stock price volatility and ZEV credit balances illustrates the investor confidence in manufacturers that are pushing the boundaries of automobiles and adopting the newest and most sustainable technologies. As manufacturers trend towards EV dominant model line ups, investors gain confidence in the company due to them adapting to new regulations and being backed by the government through ZEV credits.

Electric vehicles have become more popular around the world as a way for individuals and manufacturers to combat climate change and reduce their carbon footprints. Many governments have offered incentives for both the purchase and sale of electric vehicles. California has been especially proactive in aiding the transition to an electric vehicle dominant transportation industry. The findings in the analysis could have future financial and legislative implications in the transportation industry. On the manufacturer side, these results could expedite automobile companies’ process of transitioning their product lines to incorporate a larger selection of fully electric vehicles. For investors, these results could illustrate more stability in transportation investments and potentially a new hedging opportunity. 

It seems that electric vehicles are the future of transportation. If there were doubts about this before, the research presented in this article should push manufacturers and consumers to accelerate their transition to electric vehicles, going pedal to the metal.