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Gov. Newsom Says California Subsidies Powered Tesla’s Success

Leaders of the Golden State have long sought credit for the success of the world's largest electric-car manufacturer, and now Newsom is suggesting the state's incentives are responsible for the emergence of Tesla.

Lt. Governor Gavin Newsom
(TNS) — The way Gov. Gavin Newsom tells it these days, Tesla might not even exist if not for California's generous clean-air policies.

Leaders of the Golden State have long sought credit for the success of the world's largest electric-car manufacturer. But Newsom took those claims to new heights in recent speeches, suggesting the state's incentives are responsible for the emergence of Tesla.

"There was no Tesla without California's regulatory bodies, and regulation," Newsom said during a Sept. 12 panel along alongside West Coast governors. He said the company has "been a beneficiary of well over a billion dollars of subsidies" that enabled it to "grow and dominate the electric vehicle space."

Newsom took his claim a step further last week at the Climate Week summit in New York City, when he said Tesla CEO Elon Musk was "inspired by the regulatory framework in California that created that industry."

But are Newsom's sweeping claims about California's role accurate? And how much has the company actually reaped in financial benefits from the state?

The Chronicle asked the governor's office to back up his claim that the company has received more than $1 billion in subsidies, and it turns out that Tesla has benefited from state assistance to an even larger degree than he suggested.

Tesla has received more than $3.2 billion worth of direct and indirect California subsidies and market mechanisms since 2009, according to an estimate from Newsom's office.

That total includes credits the company receives for producing zero-emissions vehicles, which it can sell to other automakers, as well as more direct subsidies like rebates for Tesla buyers and sales-tax credits.

"I don't think there's any debate that the birth of Tesla and its success started in California," said Wall Street analyst Daniel Ives, who tracks electric-car companies. "It gave them the foundation to where, now, they can stand on their own two feet."

Newsom's comments about Tesla come as he has increasingly sought to portray California as a global front-runner in the race to dominate the clean-energy technology sector, including zero-emissions vehicles. In recent months, he championed that mantle as the state passed an aggressive slate of environmental legislation and a state budget with a record $54 billion for climate programs.

But a thorn in that narrative has been Tesla's announcement last year that the company will move its headquarters from Silicon Valley to Austin, Texas. Musk has frequently traded barbs with state leaders, who grumble over what they see as his lack of gratitude for the state's support. The company even received a $15 million tax credit designed to support firms that want to stay and grow in California.

" California used to be the land of opportunity," Musk told a conservative website after announcing the Texas move. "Now it has become and is becoming more so the land of overregulation, overlitigation, overtaxation and scorn."

State leaders have responded to the PR headache by emphasizing the state's historic role in propping up the company in its earliest days.

The single largest source of indirect state subsidies Tesla has received are ZEV credits, with an estimated value of more than $2.48 billion, according to Newsom's office. Starting in the 1990s, California adopted a series of clean-car mandates that allow companies to acquire credits for selling zero-emissions vehicles.

Newsom nodded to those credits recently, calling the California Air Resources Board, the agency that runs the credit scheme and sets tailpipe emission rules, the "most powerful regulator" in the country.

Dan Sperling, a member of the Air Resources Board and founding director of the UC Davis Institute of Transportation Studies, said such credits were "the big kahuna" that helped Tesla overcome the steep entry barriers of launching a car company, especially one dependent on new technology.

" Tesla would have gone bankrupt and disappeared without California's ZEV mandate," he said.

Sperling said what Tesla has accomplished is "extraordinary" in terms of its role in establishing a global EV market. But he relates to the governor's apparent sense of frustration: "If they were gracious, they would give much more credit to California," Sperling said.

Tesla representatives would not comment for this article. The company didn't respond to repeated requests.

In the early 2000s, Ives said Musk scoured the globe to find a place with regulatory incentives that could help the company survive through its "dark early days" as it invested heavily in its manufacturing and supply operations.

Tesla found that in California, thanks to the ZEV credit system. Ives added, "if it wasn't for those credits, Musk wouldn't be the richest person in the world today."

Under the credit system, car companies are required to sell a certain percentage of fully electric and plug-in hybrid vehicles as part of their yearly sales — or face penalties. When a company sells an EV or hybrid, it receives a credit to count toward its compliance with the rule. Companies that have extra credits can sell them to competitors.

Because Tesla has only ever made electric cars, the credit became a massive windfall for the company. It has generated more than 752,446 credits since 1990, and each credit has an estimated value of $3,300.

Put plainly, Tesla has raked in money by selling credits that allowed its competitors to continue manufacturing higher-polluting cars. Tesla has sold credits to Fiat Chrysler, Mitsubishi, Mazda, Honda and Toyota in recent years.

The financial impact of California's ZEV mandate is likely far greater for Tesla on a national level because 15 other states, which follow California's regulations, have adopted identical rules and credit systems.

That windfall is only expected to increase in the coming years. California regulators recently adopted a new regulation to phase out the sale of most new gas-powered cars by 2035, formalizing an executive order Newsom signed two years ago.

Under the rule, automakers must hit a series of interim sales targets — 35% of new vehicles must be fully electric or plug-in hybrid models by 2026. That mandate ramps up to 68% by 2030, and 100% by 2035. ZEV credits can be used to offset a portion of those targets in earlier years.

That's why Tesla's profits from selling unused credits are expected to soar as its sales increase and other car companies, those selling mostly gas-powered cars, need more credits than ever.

Some environmentalists have held their nose in supporting the concept of the ZEV credit system since it allows more traditional auto companies to keep selling gas guzzlers. Several groups have called on the state to tighten its clean-car rules that take effect in 2035 to prevent companies from carrying forward a glut of credits they've banked today.

But, on the whole, Sasan Saadat, a senior researcher and policy analyst at Earthjustice, an advocacy group, said the benefits Tesla has reaped were worth it because the "laggard" car companies helped pay for innovation in the EV space.

"Absolutely, it was worth it," he said. "We need to help defray the upfront costs of new technologies that will be crucial to fighting climate change."

ZEV credits have been the elephant under the Tesla hood, but they're far from the only state-provided incentive that have fueled that company's success. Among the other direct and indirect subsidies, according to Newsom's office:

— More than $436 million in rebates for buyers who purchased Teslas and applied for subsidies through a state program known as the Clean Vehicle Rebate Project. Roughly 173,500 Tesla buyers have received rebates. While that money doesn't go directly to Tesla, the rebates are designed to entice more drivers to buy EV models. But Tesla customers are effectively barred from receiving these rebates going forward because the state capped the retail price of eligible cars at $45,000, and Tesla recently increased the price of its Model 3 to over $46,000.

— Roughly $115 million in low-carbon fuel standard credits, a program that allows companies to earn credits for producing more eco-friendly fuels. Tesla receives credits for building electric charging stations. It can, in turn, sell those credits to energy companies.

— About $223.5 million via a sales-tax credit meant to promote companies in alternative energy and advanced transportation, through a program known as California Alternative Energy and Advanced Transportation Financing Authority tax credits.

— $15 million in a California Competes tax credit, which reduces a company's income taxes. The credit is designed for companies that want to move to California or stay and grow here. Tesla was awarded its credit in 2015.

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