Volkswagen may buy green credits from Tesla to comply with Chinese environmental rules

By Ashika Rajan, Trainee Reporter
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Volkswagen ID.4SUV
Volkswagen's new electric car ID.4 SUV

The German automobile manufacturer Volkswagen’s joint venture in China has agreed to purchase green car credits from the electric car and clean energy company Tesla to help meet local environmental laws.

The agreement, which is the first of its kind between the two companies in China, emphasizes the enormity of the challenge Volkswagen faces in transforming its vast petrol carmaking company into a pioneer in electric vehicles that can compete with Tesla.

Volkswagen, the world’s second-largest automaker, has seen its stock soar this year as investors warm to the company’s plans to go electric. However, the German company is still heavily dependent on traditional combustion-engine vehicles in China and elsewhere. China, the world’s biggest auto market with over 25 million vehicles sold last year, has a credit scheme in place that allows manufacturers to work toward a cleaner future by enhancing fuel efficiency or producing more electric vehicles.

Green credits are issued to producers, which can be used to mitigate negative credits for making more polluting vehicles. They may also purchase green credits to ensure that total targets are met, but this is normally done between affiliated companies with a common stakeholder.

According to the sources, Volkswagen’s joint venture with state-owned Chinese automaker FAW, or FAW-Volkswagen, has agreed to purchase credits from Tesla to help achieve increasingly difficult goals.

Volkswagen has been quiet on the deal. It said in a statement that it was “strategically targeting to be self-compliant” with Chinese regulations, but that it would buy credits if necessary.

Last year, FAW-Volkswagen sold 2.16 million vehicles. The company, along with another Volkswagen venture in China, SAIC Motor, was among the worst-performing automakers in the country in 2019.

In China, the ventures’ gasoline sedans and SUVs have fared much better than their electric vehicles. It’s uncertain how many green credits FAW-Volkswagen would purchase from Tesla, but the bid was about $456.6 per credit, which is higher than previous years’ rates.

Volkswagen is effectively subsidizing a competitor as the German company steps up production of electric vehicles. This year, its Chinese ventures intend to release five electric ID series models.

Tesla has sold regulatory credits to rivals such as Fiat Chrysler, now part of Stellantis, in the US, where regulators have set environmental requirements, but it has not announced any deals in China, where it began producing cars in late 2019.

In 2020, Tesla earned $1.58 billion from the sale of regulatory credits.

Related: Volkswagen bets big on Electric with 6 new battery cell factories by 2030