How could an innovative electric vehicle company have a $7 billion climate change problem? Tesla has made its name – and earned a 7x revenue multiple – popularizing electric sports cars that many hope will serve as a role model for how to clean up the 26% of U.S. carbon emissions from transportation., However, supply and demand shocks related to climate change could jeopardize Tesla’s survival.
Tesla’s thin supply chain may be the company’s weakest link in adapting to climate change. While producing the bodies of its vehicles in-house, Tesla relies on a globally dispersed supply chain for over 3,000 parts. Of Tesla’s 350 suppliers, the vast majority are “single source” suppliers, i.e. the only places in the world that Tesla gets critical components, including its motors, brakes, microcontrollers, and batteries. Many of Tesla’s suppliers rely on highly customized machinery and proprietary knowledge that are difficult to replicate quickly.
We have seen what can happen to the global auto industry when natural disasters destroy supplier operations. In March 2011, the Tohoku earthquake and tsunami wreaked havoc on Japan’s automotive industry. Carmakers a world away were buffeted by the aftershocks as they struggled, in some cases for months, to locate alternate suppliers for essential microcontrollers and automotive chemicals. Global automakers outside Japan lost half a million units of vehicle production in the aftermath of the tsunami as a result of supply chain shocks. Later that fall, after severe flooding wiped out 75% of Thailand’s automotive suppliers, it took some global automakers up to six months to restore operations at their Thai factories.
With a changing climate, the incidence of extreme weather events will increase. Already, in the United States the average annual damage from severe storms and flooding has increased by 1,000% to over $17 billion since 1980. Never-before-seen “century storms” are also on the rise. In 2004 Brazil experienced its first-ever Atlantic hurricane, a phenomenon once thought impossible. In 2013 the Philippines faced “super typhoon” Haiyan, the strongest typhoon on record. Even sunny California, where Tesla bases the bulk of its manufacturing is not immune. Hotter temperatures and prolonged drought have sparked the rise of extreme wildfires such as those in 2015 that burned 10 million acres and destroyed $3 billion of property.
All companies must wrestle with increasing risk to their operations both abroad and at home. But Tesla, with its thin supply chain, faces a particularly costly challenge. A three-month supply chain disruption could easily cost Tesla over $1 billion in lost sales at today’s production levels, and over $6 billion at 2018’s projected output. Tesla states that it is looking to diversify its supply chain spurring industry rumors and numerous press articles about whether Tesla is courting battery suppliers in Korea even while building its Gigafactory with Panasonic in Nevada. However, Tesla’s financial statements reveal a complacency around its supply chain resiliency, repeatedly disclosing that a majority of Tesla’s supply chain relies on single-source suppliers.
Tesla faces additional climate change risks on the demand side, although this time from climate change regulation. Electric vehicles produce 53% less lifetime greenhouse gas emissions than a conventional car, but their production – particularly the addition of large lithium-ion batteries – generates far more emissions at the start. The Union of Concerned Scientists estimates that a Tesla Model S requires 6 tons, or 68% more, carbon dioxide to produce than a similarly sized conventional sedan.
Tesla’s long-term strategy to scale sales of its vehicles relies on reducing the cost of its current $75,000 Model S sedans down to a more affordable $35,000 Model 3 series. However, should the U.S. government implement a carbon pricing scheme to reduce emissions of greenhouse gases, Tesla would immediately face a larger sticker price increase than its conventional vehicle competitors. Depending on the price of carbon, Tesla’s Model S vehicles could face an additional $3,000 charge or more, twice the cost imposed on conventional vehicles. At Tesla’s planned 2018 production levels, this difference in the carbon cost between Tesla and conventional vehicles would be worth $660 million on an annual basis, and that is before considering the price elasticity of vehicle purchases.
To date, Tesla has focused its energies on stressing the total lifetime emissions reduction value of its vehicles, instead of the carbon emissions released during production. And this strategy is winning for now – in the United States, Tesla vehicles are eligible for a $7,500 Federal income tax rebate, more than offsetting the charge Tesla might face from a front-end carbon price. And that’s before considering the ample state tax incentives. However, Tesla should have its regulatory strategy ready should Congress take up carbon pricing again.
To be clear, the supply chain and carbon emissions challenges facing Tesla pale in comparison to the challenges facing the broader automotive industry. However, even a darling example of the fight against climate change is not immune from climate change’s costly impacts. Hence, Tesla’s $7 billion climate change problem is just a taste of the United States’ $1.9 trillion climate change problem.
 Devonshire Research Group, LLC. “Tesla Motors, Inc.” March 2016. (http://www.devonshireresearch.com/research/Devonshire%20Research%20Group%20-%20Tesla%20Motors%20-%20TSLA%20-%20Public%20Release.pdf).
 U.S. Environmental Protection Agency. “Sources of Greenhouse Gas Emissions.” 2014. (https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions).
 Tesla Motors, Inc. “Annual Report for Fiscal Year Ended December 31, 2015.” 2016. (http://ir.tesla.com/secfiling.cfm?filingID=1564590-16-13195&CIK=1318605).
 Haraguchi, Masahiko, and Upmanu Lall. “Flood risks and impacts: A case study of Thailand’s floods in 2011 and research questions for supply chain decision making.” International Journal of Disaster Risk Reduction. 2014. (http://water.columbia.edu/files/2014/10/supply_chain_Thailand.pdf).
 Author’s analysis of data from NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters. 2016. (https://www.ncdc.noaa.gov/billions/).
 Author’s analysis; assumes current production levels of 2,000 cars/week and 2018 production levels of 9,600 cars/week.
 Union of Concerned Scientists. “Cleaner Cars from Cradle to Grave.” November 2015. (http://www.ucsusa.org/sites/default/files/attach/2015/11/Cleaner-Cars-from-Cradle-to-Grave-full-report.pdf).
 Assumes a fully-loaded carbon price of $220 per ton based on Moore, Frances and Delavane Diaz. “Temperature Impacts on Economic Growth Warrant Stringent Mitigation Policy.” Nature Climate Change. 2015. (http://www.nature.com/nclimate/journal/v5/n2/full/nclimate2481.html).
 Davenport, Coral. “EPA Warns of High Cost of Climate Change.” The New York Times. June 22, 2015. (http://www.nytimes.com/2015/06/23/us/politics/effects-of-climate-change-could-cost-billions-epa-report-says.html?_r=0).