Volkswagen has inked a deal to buy carbon credits from Tesla China in a bid to meet environmental regulatory standards. The deal appears to be a “stopgap” measure that will buy Volkswagen more time to develop its own electric car manufacturing capacity to the point where it can compete with Tesla in major markets like China. Gasoline-burning vehicles still makes up the vast majority of its business.
The market for carbon credits is worth billions of dollars every year and tends to be especially profitable for corporations like Tesla that make the upfront investment to exceed regulatory standards. Tesla alone sold $1.58 billion in carbon credits last year despite its ongoing legal complaint that the delay in Obama-era environmental regulations harmed the carbon credit market.
The carbon credit market has sometimes been criticized as giving corporations a way to dodge having to make the upfront investment needed to meet carbon emission standards. Some have also said that it only gives those who have made the investment to exceed regulatory standards a way to soak up residual income from the sale of their carbon credits while other corporations get a pass to continue to pump pollution into the atmosphere. A decades-old wind farm in China, for instance, can still sell its carbon credits to large oil and gas companies like France’s Total, which uses its purchase of carbon credits to bolster its claim that its operations are carbon-neutral.
China runs a credit system for vehicle makers that work on electric vehicles or improve their gasoline-burning vehicles’ gas mileage. If some vehicles exceed the regulatory standards, they can be used to offset the vehicles that don’t meet the standards yet.
However, Volkswagen is still heavily reliant on gasoline vehicles in some countries, including China, despite its investors’ increasingly warm reception to its plans to go electric. Many of Volkswagen’s most popular vehicles in the Chinese market are also its heaviest polluters.
Meanwhile, Tesla continues to ramp up its production capacity with the construction of new Gigafactories and possible expansions of existing ones even after a record-setting 2020 in which it delivered nearly 500,000 vehicles. Elon Musk recently announced that the Gigafactory in Austin will hire 10,000 new employees as part of preparations for its planned opening in Q4 2021. Some rumors say that Tesla was the one that leased the undeveloped land near Gigafactory Shanghai, possibly for new expansions of the factory. Construction continues on Gigafactory Berlin despite a partially successful legal challenge by German environmental groups. By making the investment in increased production capacity, Tesla puts itself in a good position to both deliver more vehicles and sell more carbon credits.
Those interested in a Volkswagen electric vehicle can already build and reserve the ID.4. According to information on Volkswagen’s website, the ID.4 starts at an MSRP of $39,995 with the possibility of U.S. federal tax rebates that could bring the base price down to $32,495. By way of comparison, the least expensive Tesla vehicle, the Model 3 Standard Range Plus, starts at a base price of $36,990, with a “fully loaded” option at $49,990.
Volkswagen seems disinterested in commenting on the agreement with Tesla and much of the information on the purchase of carbon credits from Tesla comes from anonymous sources familiar with the matter. In a statement, Volkswagen said only that it is working on meeting China’s standards, but will purchase carbon credits as necessary.