If you glanced toward America's neighbor to the north, you might see tension so thick you could cut it with a knife. Canada isn't thrilled with U.S. trade policy. And U.S. President Donald Trump isn't happy with Canada.
Some in Canada are equally unhappy with Trump's former partner Elon Musk and his company Tesla (TSLA 3.13%) after its rush to file for expiring incentives raised eyebrows, but was later found to be legit.
So Canada, Musk/Tesla have a rocky relationship. But Canada might end up lining Tesla's figurative pockets.
How'd we get here?
Tesla and its investors have had to deal with scrutiny regarding how the company generates revenue and profits from selling zero-emissions credits since day one. People occasionally joked that Tesla was better at selling emissions credits than building cars, but since those credits generated about 40% of the company's profits in 2024, it's no laughing matter.
Companies get credits for selling zero-emissions vehicles (ZEVs), and are allowed to sell credits over the max they are required to have to other companies.
Now the narrative for Tesla is going a step further with the most unusual dance partner: Canada. The Canadian government put regulations in place stating that zero-emissions vehicles must comprise 20%, 60%, and 100% of light-duty vehicle sales by 2026, 2030, and 2035, respectively.
For context, ZEV market share was 9.7% of new vehicles registered in Canada during the first quarter. It's a lot to ask that that percentage double by 2026, and it seems unlikely to be achieved at a time when EV sales have yet to take off with the speed once anticipated, and with uncertain trade policies and tariffs in North America with its extensive and complicated automotive distribution across Canada, Mexico, and the United States.
A Tesla Cybertruck. Image source: Tesla.
Buying credits
In Canada, automakers will face penalties of $20,000 per vehicle for falling short of regulatory targets. What's an automaker to do if it knows with near certainty that it'll miss Canada's targets?
One option is to simply buy some of Tesla's pile of credits, as the pure EV maker doesn't have to cover a line of its own gasoline-powered vehicles facing penalties. Tesla reported $2.8 billion in revenue last year from the sale of credits. These zero-emissions credits are also unlike most sales in the automotive industry in that they are considered essentially pure profit, aiding Tesla's margins.
Tesla is already selling limited numbers of credits in British Columbia and Quebec, and already selling five times as many as General Motors and Hyundai (the other two auto sellers of credits) combined, according to Automotive News. The publication reported Tesla sold nearly 32,000 credits in Quebec from 2020-2024.
But if automakers see they'll fall short of targets, and policy remains determined to punish those that miss targets, Tesla could be a major beneficiary of a surge in emissions credits purchases.
What it all means
This may be one of the few positives for Tesla investors to grab onto right now. The fact that it could be Canada boosting Tesla's top and bottom lines after multiple punches thrown across the border is unexpected. But any boost in demand for Tesla's pile of highly valuable zero-emissions credits is great news as the company attempts to rebound from a 13.5% drop in global vehicle deliveries during the second quarter, compared to the prior year.
However, while this is a little bit of good news for investors, it doesn't fundamentally change Tesla's investment thesis. Right now, investors might be wise to wait until the upcoming November shareholder meeting to better understand the company's direction, before starting a new position in the EV maker.
