Nikolas Kokovlis | Nurphoto | Getty Images

Elon Musk’s xAI, which merged with SpaceX last week, is facing increased pressure from environmental and civil rights groups over pollution concerns, this time at the company’s facility in Southaven, Mississippi.

On Friday, the Southern Environmental Law Center and Earthjustice, on behalf of the NAACP, sent a notice of intent to sue xAI and subsidiary MZX Tech LLC, saying the company’s use of dozens of natural gas-burning turbines requires a federal permit, violates the Clean Air Act and harms nearby communities.

Pollution from the turbines, which xAI has also used in Memphis, Tennessee, for its Colossus 1 and Colossus 2 data centers, has been a major source of local contention for more than a year.

Plans for a third data center in Southaven, located about 20 miles from Memphis, were announced early this year, when Mississippi Republican Governor Tate Reeves said he expected the project to create “hundreds of permanent jobs throughout DeSoto County.”

Launched by Musk in 2023, xAI is trying to compete with OpenAI, Anthropic and Google in the booming generative AI market. On Feb. 2, Musk said SpaceX, his rocket maker and defense contractor, acquired xAI in a deal that valued the combined entity at $1.25 trillion.

Musk is banking on the area in and around Memphis as the foundation of his AI ambitions, and he’s been flouting environmental rules in order to develop as quickly as possible. Musk’s social network X, formerly Twitter, is also owned by xAI, which created the Grok AI chatbot and image generator.

XAI is currently under a myriad of government investigations in Europe, Asia and the U.S. after Grok enabled users to easily create and share deepfake porn, including explicit imagery depicting child sexual abuse.

Last year, residents in the majority-Black community of Boxtown in South Memphis testified at public hearings about a stench in the air, and the impact of worsening smog on their health caused by xAI’s use of natural gas turbines. Research by scientists at the University of Tennessee also found that xAI’s turbine use added to air pollution woes in the area.

Environmental advocates, including the NAACP, had previously said they would sue to stop xAI’s un-permitted use of the turbines in Memphis. But they stopped short of filing a legal complaint after Shelby County’s health department allowed xAI to treat the turbines as temporary, non-road engines, and issued permits for their use.

At the federal level, the EPA recently clarified gray areas of the law and said these turbines can’t be categorized as temporary non-road engines. Nonetheless, xAI has been using the turbines across state lines without obtaining federal permits.

XAI didn’t immediately respond to a request for comment.

Noise pollution from the turbines has also been a source of local consternation. Jason Haley, a Southaven resident, told CNBC the turbines make headache-inducing noises around the clock that he can hear inside his home.

Haley is part of a group called Safe and Sound which documents the decibel levels, and is pressing local officials to stop xAI from making so much noise, especially overnight, with its turbines.

Mississippi officials will hold a public hearing, scheduled for Tuesday, for community members who wish to express their concerns about xAI’s expansion plans in the area. The hearing will focus on whether the state should give xAI permission to install and run 41 permanent turbines at its Southaven facility, Mississippi Today previously reported.

Similar community dynamics are playing out across the U.S. as tech giants rush to construct massive data centers, which can strain local energy and water supply and cause prices to increase.

In November, Microsoft ended efforts to build a data center in Wisconsin due to the community’s vocal opposition. Amazon also pulled out of plans for a data center in Arizona after community protests.

In terms of Musk’s Southaven project, Patrick Anderson, a senior attorney with SELC, said xAI “has to follow the law, just like any other company.”

“And when it flouts the Clean Air Act’s bedrock protections against unpermitted emissions, it puts the health and welfare of ordinary citizens at risk,” Anderson said in an email. “That’s why we intend to hold xAI accountable here.”

The Mississippi Department of Environmental Quality did not immediately respond to requests for comment.

Read the environmental groups’ notice of intent to sue xAI here:

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Elon Musk, chief executive officer of Tesla Inc., during the US-Saudi Investment Forum at the Kennedy Center in Washington, DC, US, on Wednesday, Nov. 19, 2025.

Bloomberg | Bloomberg | Getty Images

Elon Musk said a primary reason for merging SpaceX with his artificial intelligence startup, xAI, is to more effectively build “orbital data centers.” That’s for a far-off future.

For now, xAI has a much more pressing need: cash.

In Monday’s blog post announcing the combination of his two companies, Musk estimated that “within 2 to 3 years, the lowest cost way to generate AI compute will be in space.” But xAI requires immense amounts of money to finance its massive infrastructure buildout as the three-year-old company tries to catch up to Google, OpenAI and Anthropic in the booming generative AI market.

SpaceX, which is reportedly aiming to go public this year in what could be a record-setting IPO, may represent Musk’s clearest path to landing that capital. The company is looking to raise up to $50 billion at a valuation as high as $1.5 trillion, according to Reuters.

A major key to SpaceX’s growth is Starlink, its satellite internet service, which has around 9,000 satellites in orbit today and roughly 9 million customers. It recently received authorization from the Federal Communications Commission to put another 7,500 satellites into orbit.

Tim Farrar, president of satellite and telecom industry research firm TMF Associates, said SpaceX can’t put that kind of money to work towards its existing business because there are only so many rocket launches available to get its Starlink satellites up into space each year.

Folding xAI into SpaceX, Farrar said, allows Musk to capitalize on investors’ insatiable appetite for AI holdings, while also securing the AI company’s financial position despite its mounting losses. According to a report from The Information late Monday, xAI has told investors that it burned about $9.5 billion through the first nine months of 2025.

“People are throwing tens of billions of dollars at AI companies right now, and in six months or 12 months time, they might have changed their mind about it,” Farrar said. “Getting the money is feasible” now but may not be forever.

In early January, xAI closed a $20 billion funding round at about a $230 billion valuation. OpenAI was valued at $500 billion in October, and is reportedly looking to bump that up to about $750 billion in its next round. Anthropic signed a term sheet this month for a funding that values the company at $350 billion.

In addition to a friendly capital market, Musk has the benefit of an extremely favorable regulatory landscape, as the Trump administration rolls back environmental, antitrust and other regulations.

Nowhere in Monday’s blog post was there mention of any need for regulatory approval, and Musk suggested in the first sentence of the statement that the transaction is done. Public records with the state of Nevada obtained by CNBC indicate that the deal was completed on Feb. 2, with Space Exploration Technologies Corp. listed as the “managing member” of X.AI Holdings.

Of particular importance to Musk is the recent installation of his business associate and former SpaceX investor and customer Jared Isaacman as the head of NASA. Isaacman has supported speeding up initiatives that would expand the agency’s contracts with SpaceX. And at the FCC, Chairman Brendan Carr has been a vocal proponent of SpaceX’s Starlink.

Commander Jared Isaacman of Polaris Dawn, a private human spaceflight mission, speaks at a press conference at the Kennedy Space Center in Cape Canaveral, Florida, U.S. August 19, 2024. 

Joe Skipper | Reuters

The landscape for tech mergers has also changed dramatically, with President Donald Trump in the White House and Republicans controlling both houses of Congress. The Federal Trade Commission is now run by Trump appointee Andrew Ferguson rather than Lina Khan, who was known for blocking big tech deals during Joe Biden’s presidency.

When it comes to AI, Musk’s longtime friend David Sacks is the White House crypto and AI czar, and has pushed the federal government to limit the amount of oversight AI labs face as they pursue aggressive growth strategies. In December, President Trump signed an executive order issuing a single regulation framework for AI, undermining the power of individual states — namely blue states like California and New York — to implement their own rules.

“To win, United States AI companies must be free to innovate without cumbersome regulation,” the order said. “But excessive State regulation thwarts this imperative.”

While Musk still has three years left of a second Trump administration, he may have only a small window of unified Republican control, with the mid-term elections taking place in nine months and the president’s favorability numbers sinking.

Related party transactions

Musk is moving fast. And he likely has the backing of a loyal band of investors who have a long history of supporting his intermingling of resources and merging of companies.

In 2016, Tesla acquired SolarCity for $2.6 billion, rescuing it from a looming liquidity crunch. Before the merger, Musk was a key investor in the solar business and served as chairman of the company, which he started with his cousins.

During his leveraged buyout of Twitter (which later became X) in 2022, Musk sold billions of dollars worth of his Tesla shares to finance the deal. He also tapped dozens of employees, even some executives, from SpaceX, Tesla and tunneling venture The Boring Co., to help him with the takeover and to make sweeping changes to the platform.

At Tesla, Musk has engaged in a number of related party transactions with SpaceX and, more recently, xAI. For example, Tesla has sold car parts and solar equipment to SpaceX, and the automaker relied on SpaceX to develop a special alloy for its Cybertruck.

In 2025, Tesla sold $430 million worth of its giant backup batteries called Megapacks to xAI, according to a filing out last week, accounting for about 3.4% of Tesla’s energy business revenue for the year. The batteries help power xAI’s data infrastructure that it’s building out around Memphis, Tennessee.

Shortly before that filing landed, Tesla said it was investing $2 billion into xAI as part of the company’s latest financing round. In July 2025, SpaceX reportedly invested $2 billion into xAI as well.

Farrar said that Musk’s biggest fans and institutional investors are willing to support the tangled web of transactions, or the “Muskonomy,” in part because they understand the symbolic importance of keeping his entire portfolio strong.

“The whole thing relies on confidence in him,” Farrar said. “If any piece of his empire was to fall by the wayside or go bankrupt, then it would undermine everything.”

WATCH: SpaceX could be the first $500 billion IPO, says Lerer Hippeau’s Eric Hippeau

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Elon musk and the xAI logo.

Vincent Feuray | Afp | Getty Images

The Environmental Protection Agency closed a loophole this week that Elon Musk’s xAI had exploited to rapidly stand up its first data center in Memphis, Tennessee.

Musk’s artificial intelligence startup created a kind of off-grid power plant for its Colossus facility by using a cluster of gas-burning turbines. The company was able to avoid air pollution permitting by classifying the turbines, which were mounted on trailers, as “non-road engines.”

The EPA’s updated rule clarifies that those kinds of turbines can’t be designated as non-road engines and companies must also obtain Clean Air Act permits before installing them, particularly if their aggregate emissions will go above “major source thresholds” of pollution.

The Shelby County Health Department in Memphis previously allowed xAI to designate its turbines as non-road engines, and to start using them without any public comment and environmental impact review, as would have been required in a standard permitting process. 

Representatives from the county’s health department and xAI didn’t respond to requests for comment.

The move by the federal regulator could slow xAI’s expansion in the Memphis area as it builds out facilities, packed with Nvidia’s graphics processing units, to develop AI models and services in a booming generative AI market currently led by OpenAI and Google.

At the Memphis data center, which first opened in 2024, xAI conducts inference and training for its Grok models and apps, including a chatbot and image generator tightly integrated into the company’s social network X.

While xAI had previously told Memphis regulators that its turbines would include state-of-the-art pollution controls, known as selective catalytic reduction technology, its supplier, Solaris Energy Infrastructure told CNBC in June that it did not install such controls in xAI’s “temporary” turbines.

SEI, a Houston-based energy services provider, has seen its stock price soar in recent months, partly due to xAI’s expansion plans. SEI didn’t respond to a request for comment.

Pollution from the turbines has been a major source of local contention.

Last year, residents in the majority-Black community of Boxtown in South Memphis testified at public hearings about a rotten egg-like stench in the air, and the impact of worsening smog on their heart and lung health.

Research by scientists at the University of Tennessee in Knoxville also found that xAI’s turbine use added to air pollution woes around Memphis.

Environmental advocates, including the NAACP, said they would sue to stop xAI’s unpermitted use of the turbines. However, they didn’t file a complaint after the county allowed xAI to treat the turbines as temporary, non-road engines, and issued them permits.

Amanda Garcia, an attorney with the Southern Environment Law Center, which is representing the NAACP, said in an email that her firm will monitor xAI operations to ensure they aren’t violating terms of their permits, and are operating within the bounds of current EPA rules at forthcoming facilities in nearby Mississippi. 

XAI, which recently raised $20 billion from investors including Nvidia and Cisco, is currently being investigated in multiple jurisdictions after its Grok and X apps let users easily create and distribute deepfake violent and sexualized images of women and even children.

WATCH: xAI closes $20 billion funding round

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People dine inside during the opening of the Tesla Diner and drive-in restaurant and supercharger on Santa Monica Blvd. in the Hollywood neighborhood of Los Angeles on July 21, 2025.

Patrick T. Fallon | Afp | Getty Images

Elon Musk’s flagship Tesla Diner opened Monday in Hollywood, California, and the CEO is already eyeing expansion.

“If our retro-futuristic diner turns out well, which I think it will, @Tesla will establish these in major cities around the world, as well as Supercharger sites on long distance routes,” Musk wrote on social media platform X.

He later replied to a user requesting a location in Starbase, Texas, which is home to Musk’s SpaceX, saying “Ok.”

The Tesla Diner has 80 charging stations, two giant megascreens and classic American diner food. It is open 24 hours a day, seven days a week.

Diners can watch movies on two of the 66-foot screens or in their vehicle using the Tesla Diner app. The location features all things Tesla, with merchandise and an Optimus robot serving popcorn.

Scroll through photos from the Tesla Diner below:

A view of the entrance of the Tesla Diner and drive-in restaurant in Los Angeles on July 21, 2025.

Vcg | Visual China Group | Getty Images

Tesla Cybertruck-inspired food boxes are displayed during the opening of the Tesla Diner and drive-in restaurant and supercharger on Santa Monica Blvd. in the Hollywood neighborhood Los Angeles on July 21, 2025.

Patrick T. Fallon | Afp | Getty Images

Tesla Bot Optimus hands a boy a tub of popcorn at the Tesla Diner and supercharger station in Los Angeles on July 21, 2025. Tesla’s first “retro futuristic” diner and drive-in theater, featuring 32 V4 Supercharger stalls, has opened in Hollywood.

China News Service | China News Service | Getty Images

Tesla electric vehicles charge as people wait in line outside the Tesla Diner and drive-in restaurant in Los Angeles on July 21, 2025.

Vcg | Visual China Group | Getty Images

A Tesla Optimus robot scoops popcorn and waves at attendees during the opening of the Tesla Diner and drive-in restaurant and supercharger on Santa Monica Blvd. in the Hollywood neighborhood of Los Angeles on July 21, 2025.

Patrick T. Fallon | Afp | Getty Images

Tesla electric vehicles charge outside the Tesla Diner and drive-in restaurant and supercharger in Los Angeles on July 21, 2025.

Vcg | Visual China Group | Getty Images

People dine inside the Tesla Diner and drive-in restaurant and supercharger in Los Angeles on July 21, 2025.

Vcg | Visual China Group | Getty Images

The newly installed sign for Elon Musk’s Tesla Diner is seen at the restaurant on Santa Monica Blvd. in the Hollywood neighborhood of Los Angeles on July 8, 2025.

Robyn Beck | Afp | Getty Images

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