President Donald Trump on Thursday confirmed that the United States would exit the Paris climate agreement that was signed at the conclusion of the United Nation’s Climate Change Conference in 2015. It’s a move that will have wide-reaching impacts across the energy sector, but also will filter its way to Tesla Inc (NASDAQ:TSLA) — even if Tesla stock isn’t immediately reacting to the news.
The deal was to begin taking measures — on an honor system that was non-binding aside from a “name and shame” dynamic — to reduce carbon emissions in 2020. The Obama Administration committed to a 26% to 28% drop below 2005 carbon levels by 2025, a quarter of which was to be achieved by the implementation of its Clean Power Plan.
This is all bad news for TSLA. Tesla’s expensive battery-powered electric vehicles, solar roof panels and battery backup systems depend not only on a popular focus on reducing carbon emissions, but depends heavily on the subsidies and end-user tax credits to increase the cost competitiveness of its offerings.
By exiting the Paris deal, Trump is poised to pull the plug on billions in taxpayer funded investments in low-carbon technologies. In doing so, according to the U.S. Chamber of Commerce, Trump is saving 1.1 million jobs in the industrial sector. And he is saving the average family of four $20,000 by 2035 via lower electricity costs according to the Heritage Foundation.
Ahead of the announcement, Tesla CEO Elon Musk threatened to resign from Trump’s industry advisory council in protest. Musk made good on his promise, exiting along with Walt Disney Co (NYSE:DIS) CEO Robert Iger.
No doubt motivated by the fact his company is fueled by $4.9 billion in government subsidies of various types, according to the Los Angeles Times. This along with the fact Tesla isn’t profitable and is rapidly burning through cash, necessitating frequent capital raises, drew the ire of GM’s former vice chairman Bob Lutz, to the chagrin of Tesla stock bulls.
For now, TSLA isn’t really responding to the news. Shares have rallied more than 11% during the past two weeks to push above the $340-a-share level. But with valuations eye watering and the market capitalization worth more than Ford Motor Company (NYSE:F), Trump’s announcement will soon be seen as the major headwind — a drying up of the government teat that fundamentally changes Tesla’s operating outlook.
That, and the fact that Musk’s production estimates for the upcoming Model 3 don’t make any sense.
Watch for a pullback to the 200-day moving average, last touched in December, which would be worth a 30% decline from here.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
