Recently, shares of Tesla were down 2.6% to $310.87 after rallying 8% earlier in the week. The stock dropped after President Trump signed legislation which took away California’s right to regulate air emissions; this new law directly impacts Tesla’s ZEV credit sales which have represented a significant portion of the company’s revenue.

The History of ZEV Credits

Tesla has crystallized hundreds of millions each quarter on ZEV credits. For a company taking nearly $3 billion in fiscal 2024 on ZEV credits, including a gigantic $595 million in just the first quarter of 2025, it’s easy to see how ZEV credits can be a good business. 

 As regulators question the sustainability of ZEV credits for use in California this past month, it presents a new risk for investors as the government may lurch a step further away from ZEV credits in negotiating the deal. California regulators have publicly labeled this bill “unconstitutional, illegal, and foolish,” while also vowing to fight it in court  but with so much uncertainty investors could nevertheless be exposed to it.

Effect on Tesla’s Financials and Stock

The potential loss of revenue from ZEV credits could prove incredibly expensive for Tesla. According to some analysts at JPMorgan, the loss of ZEV credits from this legislation could result in a $2 billion decline in revenue, in addition to the loss of up to $7,500 of federal tax credits from certain Tesla EV buyers, which they estimated could shave another $1.2 billion off of Tesla’s full-year profit. This news has already provided more pressure to Tesla’s already declining stock price.

That said, analysts have some optimism for Tesla. Wedbush analyst Dan Ives still has a Buy rating on the stock with a price target of $500, and observes that Tesla’s growth in artificial intelligence and robotics will be just as much if not more than its growth in cars. 

The Road Ahead for Tesla

Tesla is in a complicated place. The loss of ZEV credits may come with short term pain on profit, but its move into AI and autonomous driving technology offers some hope for the future. Based on Wall Street’s predictions, we might see a rebound in earnings during the year 2026, following the declines seen from 2023-2025. Adds the complexity of regulatory risks and changing political winds on EV incentives.  The launch of Tesla’s Robotaxi service could fundamentally change the stakes, offsetting some of the loss of revenue associated with the regulatory credit changes.

Author’s view: 

Tesla is experiencing significant stock volatility that reflects the tension between regulatory risks to its business, and the possibility of innovation. The loss of ZEV credits represents a serious headwind for Tesla but their beginnings of AI ventures and launch of the Robotaxi service could change their growth trajectory in the next few years.