Tesla could land $500 million dollar payday, courtesy of Fiat Chrysler in emissions tradeoff

Tesla and Fiat Chrysler have entered into a deal to help the heritage automaker weather strict European Union emissions regulations that are set to take effect next year, according to a report published by Financial Times. This arrangement is the first of its kind and is estimated by one Wall Street firm to equate million dollars worth of credits to Tesla from Fiat Chrysler over the next 2-3 decades.

Jefferies on the @Tesla @fiat open pooling arrangement:

“We assume that compensation to Tesla could be in excess of $500m relating to 2020 and 2021 each with payments possibly starting earlier (2019) to spread costs”.

— Patrick McGee (@PatrickMcGee_) April 8, 2019

Beginning in 2020, 95% of automotive fleet-wide emissions in the EU must average under 95g of CO2 per kilometer, i.e., have a fuel efficiency of about 57 mpg for internal combustion vehicles. In 2021, full fleets must be compliant, and the penalties could add up to financial ruin for businesses unable to meet with the strict criteria.

The EU rules allow auto companies and divisions to pool together to form an expanded fleet, thus averaging emissions out . Branches to satisfy the criteria can be combined with their emissions by companies with existing divisions that are low or zero emissions, or if the benefit outweighs the arrangement, they could unite with businesses like Tesla whose all-electric, zero emissions fleets would provide average emissions reductions.

Tesla offered its “pool that was open ” bargain to automobile makers, but the Italian-American car maker was the only one having an arrangement by Tesla’s March 25th deadline. Fiat Chrysler has been slower than its industry peers to embrace an electrification plan because of its vehicles sold in the area and needed to get more time before a plan could be exercised. The business has announced a $10.5 billion dollar strategy to bring alternative power to its vehicle lineup, but any efforts in that direction will not manifest into sufficient production vehicles to prevent the EU fines from the impending deadline.

Tesla Model 3 waiting to be loaded on the Glovis Captain and sent to Europe. Taken on Jan 18, 2019 at SFO. (Photo: whitfletcher/Twitter)
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Under EU rules, Tesla qualifies for “super-credits” which allow a trade-off of electrical car sales against ICE vehicles; the company has already managed similar profitable credit transactions in California that brought in $280 million dollars in 2017. This number may be where the estimated $500+ million payout amount from Jeffries Financial Group is stemming from. Altogether, the pooling arrangement appears to be a for both businesses, and the deal was agreed to on February 25th.

Tesla has become a proven leader in creating emissions-free transportation. Since the launch of its Model S luxury sedan, the car’s appeal has fueled the increase of the company on its fourth largest electric car with a fifth on the way – and new market demand for electric cars. Tesla’s competitors and many have committed billions even without looming EU regulations. US automobile industry giant Ford Motor Company, as an instance, is planning an $11 billion investment into 40 electrified vehicles by 2022, as announced at last year’s Detroit Auto show.

In general, the “Tesla Effect” on the global market has only started, and the start of the EU’s strict emissions regulations may be the tip of the iceberg of changes coming into the several industries impacted by the coming shifts in the automotive arena.

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