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What 'regulatory credits' are — and why they're so important to Tesla

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TSLATesla CEO Elon Musk speaks at a delivery ceremony for Tesla China-made Model 3 in Shanghai, east China, Jan. 7, 2020.Ding Ting | Xinhua News Agency | Getty Images

Tesla’s reliance on so-called regulatory credits to make money has been thrust back into the spotlight after a regulatory filing revealed investor Michael Burry took a $534 million bet against the electric carmaker.

Burry, who was depicted in Michael Lewis’ book “The Big Short,” has a short position on the company — betting that Tesla shares will fall.

In a now-deleted tweet, the famous hedge fund manager said Tesla’s reliance on regulatory credits to generate profits is a red flag.

Tesla raked in $518 million in revenue from sales of regulatory credits in the first quarter of the year, helping the U.S. electric vehicle maker post another quarter of profit.

What are regulatory credits? How do they work?

In a push to reduce carbon emissions, governments around the world have introduced incentives for automakers to develop electric vehicles or very low-carbon emitting cars. Credits are given to carmakers that build and sell environmentally friendly vehicles.

In the U.S., California and at least 13 other states have rules surrounding regulatory credits. They require auto manufacturers to produce