Biden’s gift to Elon Musk and Tesla

Tesla CEO Elon Musk Republican leaning, and he is not a friend of Joe Biden. But President Biden and his fellow Democrats have done Musk and company a favor that no Republican is likely to consider.

Biden’s new exhaust emissions rules, proposed by the Environmental Protection Agency on April 12, would sharply limit the pollution for cars that are allowed to emit for the years 2027 to 2032. If they are eventually adopted, in whole or in part, the new rules will effectively force the auto industry to build more. of electric cars and far fewer petrol-powered cars.

That could cause turmoil for several automakers trying to shift from gas-powered cars to electric vehicles at a measured pace that doesn’t destroy their profitability. For Tesla, (TSLA), it will be business as usual — except that competition may eventually falter due to massive new costs, as well as the stumbles that often accompany big corporate turnarounds. This makes Tesla the biggest beneficiary of the EPA’s new efforts to cut automobile-related emissions.

Ironies abound. Musk and Biden have sparred over labor unions, which Biden considers a key constituency and Musk dislikes. When highlighting the electric car rollout, Biden usually touts new efforts at Ford (F) and General Motors, (GM) that are unionized, while ignoring Tesla, which they are not. Nevertheless, Tesla is the undisputed leader in electric vehicle sales in the United States, with 65% of the U.S. electric vehicle market and far more sales in this category than Ford, GM, or any other automaker.

Musk was so upset by Biden’s rejection that in January 2022 he described Biden as “aWet sock puppeton Twitter. Later that year, Musk said he had a “very bad feeling” about the economy, and at a Biden press conference, a reporter asked Biden for his response. “So much luck on his trip to the moon,” Biden quipped, referring to from him Musk hopes to travel to space on one of his SpaceX rockets. Musk continued to tweak Biden on Twitter, and before last year’s midterm elections, Musk advised his 134 million Twitter followers to vote Republican.

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However, the Democrats are better for his car company. Musk and Tesla deserve credit for foreseeing the electrified future and for persevering through near-death experiences. But they got some help. The electric vehicle tax credit that helps subsidize the cost of an electric vehicle originated in a 2009 law passed by Democrats and signed into law by President Obama. This goose sales tax break helped Tesla through the tough years when it lost money and needed every penny. President Trump wanted it Kill that tax creditbut he wasn’t able to.

Tesla also benefited from California regulatory credits, largely governed by Democrats. California gives Tesla credits for producing zero-emission cars that can be sold to other companies that use them to offset pollution. These sales have netted Tesla hundreds of millions of dollars.

The Biden administration’s new pollution rules could force the biggest turnaround on the auto industry in its history. The EPA estimates that if the rules go into effect as proposed, electric vehicles as part of new car sales will rise from less than 6% now to about 67% by 2032. That would be a significant shift for just 10 years.

All Tesla assembly lines produce electric vehicles. At other automakers, electric vehicles are a small part of production, even with large new electrification commitments. It costs billions of dollars to build an automobile assembly line, and it costs even more to retire old ones that are no longer in use. Legacy automakers face enormous conversion costs. No Tesla.

Since 2019, North American automakers have announced approx $80 billion in new investment in electric cars. The EPA argues that a rapid transition to electric vehicles will happen no matter what, given the industry’s significant investment in this direction.

However, the new EPA rules will still impose new costs on top of the investments automakers have already planned. The new rules will raise costs across the industry by an amount Somewhere between $180 and $280 billion over the seven-year period, according to the Environmental Protection Agency. There will also be savings, such as better fuel economy for drivers and reduced maintenance for electric vehicles, compared to gas-powered models. But manufacturers largely incur costs upfront, and then pass on to consumers what they can through higher prices. That’s the tricky part for legacy automakers: financing the transition to electric without incurring losses or too many sell recommendations on their stock.

Ford and GM stocks have been pretty much range bound for years, except for a modest surge during the Covid upturn, when monetary stimulus moved the entire market. Unsteady stock trends reflect Wall Street’s concerns about the huge turnaround costs. Tesla, of course, is a top-tier car that’s still worth six times what GM and Ford combined are worth, even as its stock has fallen by more than half from its peak in 2021. Investors believe Tesla is poised to dominate an industry led by electric vehicles, and that dominance could Come sooner if Biden’s rules hold steady.

They may not.

The automakers seem sure to challenge the new proposal, saying they can’t switch to electric vehicles so quickly. So the final rule can be weakened from the proposition. There will also likely be a lawsuit challenging the Biden administration’s authority to make such a major change — without congressional legislation. The current Supreme Court, with a conservative majority 6-3, has been more skeptical of the executive branch’s authority than it has been in the past, and there is an opportunity to block such dramatic changes. The final danger of the new rules is a potential change in administration in 2024, with the potential for a future Republican president to backtrack on Biden’s standards.

All of these risks add up to a lot of uncertainty for legacy automakers that the market didn’t already like. The CEOs of these companies must plan for a future where the pace of transformation can range from challenging to devastating. Tesla has it challengestoo, but the burden of strict pollution regulation is not one of them.

Perhaps Biden and Musk should be friendlier towards each other.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @employee

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