Tesla vehicles at the company's store in Warminster, Pennsylvania.
Tesla vehicles at the company's store in Warminster, Pennsylvania. 
Joe Lamberti/Bloomberg/Getty Images

Tesla is set to report its best quarterly earnings so far this year. What lies ahead is the problem.

Analysts forecast that the company on Wednesday will report adjusted earnings of about $1.9 billion, driven by record sales of nearly 500,000 cars during the quarter. But that falls short of the $2.5 billion Tesla earned a year ago, a sign of the headwinds the company faces.

The company’s third quarter sales surged as Americans rushed to buy electric cars before a $7,500 federal tax credit expired on October 1. But American electric vehicle sales are widely expected to plunge in the fourth quarter because people who would have normally bought later in the year purchased early to lock in the tax break.

That credit loss could also affect EV demand among American buyers going forward. Tesla gets nearly half of its revenue from US customers.

The loss of a key source of income

But the removal of the EV tax credit is only part of Tesla’s problem. The Trump administration also eliminated what has been a key profit driver throughout the company’s history – the sale of regulatory credits.

In years past, the federal government set emissions limits on the total greenhouse gases that came out of all the cars a company sold in a given year. If a car company sold too many gas-guzzling pickups, as opposed to economical hatchbacks or cars with no emissions at all, it would have to buy “credits” from companies like Tesla.

Those sales have brought in $11 billion for Tesla since 2019, including $439 million in the second quarter of that year alone. Sometimes credit sales were the only thing keeping the company profitable at all – including in the first three months of this year.

But the Trump administration’s massive tax and spending bill passed by Congress in July eliminated the federal penalties for violating emissions rules, and thus the need for automakers to buy regulatory credits.

As a result, investors will be watching how much the company’s regulatory credit sales fell in the latest quarter as well as any guidance for how it will handle a future without them.

Tesla is also facing increased competition for EV sales globally, particularly from Chinese automakers. Those automakers not only dominate their own domestic market, but are also moving into Europe. Chinese automaker BYD is poised to overtake Tesla as the world’s largest seller of EVs this year, despite the fact that it does not sell any of its cars in the United States.