California proposes to accelerate mandate for zero-emission vehicle sales

California regulators plan to accelerate the near-term requirements for zero-emission vehicle (ZEVs) sales as part of the state's drive towards a net-zero economy.

In a proposal published on 12 April, the California Air Resources Board (CARB) raised the ZEV mandate to 35% of new sales for 2026, up from the current requirement of 24%. The mandate would reach 68% of new car sales in 2030 and 100% in 2035. Battery EVs, fuel cell EVs, and plug-in hybrid EVs would qualify as ZEVs.

Not only is the state the largest single market for cars in the US (at more than 12%), but under Section 177 of the Clean Air Act, other states are allowed to opt-in to all or part of California's program and thus leverage California's requirements to clean up their fleets as well.

If the 35% mandate was in effect in 2021, given that 1.86 million new cars were registered in the state it would have translated to 651,000 new ZEVs. For a point of comparison, S&P Global Commodity Insights estimates that slightly more than 700,000 ZEVs were sold across the entire US in 2021, or a market share of 4.3% (a record).

Raising production to meet the proposed new mandate can be accommodated, but it won't be easy, said Devin Lindsay, S&P Global Commodity Insights principal research analyst. "We anticipated California continuing to add to their equation," he told Net-Zero Business Daily (owned by S&P Global Commodity Insights). "It's not a shocking change because we've been seeing a few of the bricks being laid as California moves to 100% ZEVs."

The difficulty is that a 2026 mandate requires automakers to line up their models and production lines well in advance of that year, he said. "That's [2026] far off in the minds of consumers, but not in the minds of automakers or regulators," Lindsay said. "It will require manufacturers to get EVs ready for sale in a really short window."

Supply chain challenges that began with the COVID-19 economic interruptions—and now include the war in Ukraine and pressures on suppliers such as steelmakers to reduce CO2 emissions—will require automakers to solve bottlenecks "a lot sooner than they anticipated," he said.

The Alliance for Automotive Innovation (AAI), the largest US-based carmaker trade group, concurs with this opinion, telling Net-Zero Business Daily: "California's proposed ACC regulations require aggressive increases in EV sales…. Automakers will certainly work to meet whatever standards are eventually adopted, but these draft requirements will be extremely challenging even in California and may not be achievable in all the states that currently follow California's program."

Presently, 16 states have opted into the California clean vehicle program under the Section 177 provision. An opt-in allows a state to push beyond weaker federal clean car regulations that have been subject to tug-of-war rulings by Democratic and Republican administrations for over a decade.

If the 16 opt-in states fully copy California's ZEV plan (provided the plan is finalized as proposed) then in 2026 about 35.7% of the national market would be covered by the ZEV mandate, according to the Zero Emissions Transportation Association (ZETA). Given that about 14.9 million new cars are sold in the US in 2021, that works out to about 5.3 ZEVs. (It should be noted that in pre-COVID 2019, US light-duty car sales had topped 17 million.)

Looking at the CARB plan, ZETA called it "exciting to see this acceleration of transportation electrification across such a large segment of the domestic vehicle market. At a moment when gas-powered vehicles cost three-to-six times more to drive per mile than electric vehicles, it is abundantly clear that California's plan will not just boost public health and combat climate change—it will also save consumers thousands of dollars per year."

AAI said that "this transformation requires more than just making great electric vehicles or mandating their sale. It requires a concurrent commitment from federal, state, and local governments to provide certainty to automakers and confidence to customers that the necessary conditions—everything from infrastructure, demand, critical minerals, and supply chain—are in place."

Lindsay agreed that the entire auto manufacturing and usage ecosystem must evolve. But he said setting higher standards is an important part of creating those "necessary conditions" referenced by AAI.

"Regulators make aggressive announcements because they want to give some stability to the supply chain," he said. "It's saying, yes, you can invest in new components that will support battery-EVs because it is our intent to open the door [for their sales]. If you are a traditional supplier of parts for internal combustion engines, before you change over your business line, you want to have that certainty."

California's program

CARB's proposal, known as Advanced Clean Cars II (ACCII), updates a 2012 plan by speeding up the targets in the front years. It would require a near tripling of the new-car market share in only five years. In 2020, ZEVs and plug-in hybrids accounted for 7.8% of new car registrations, and that increased to 12.4% in 2021 on the way to 35% in 2026, CARB said. For the first quarter of 2022, the California Energy Commission reported that ZEVs took a 16.3% share of the new car market.

After 2026, the requirement would increase by eight percentage points per year for five years, and then by six percentage points for the next five years. CARB said this is because "staff expect the last 20% of the fleet will be more challenging to electrify than the first 80%."

The plan would modify the current cap-and-trade program through which manufacturers can earn credits for producing ZEVs above their required share. Under the current program, cars are awarded different credits based on their range and power. That will be scrapped beginning in 2026 and replaced with a minimum performance standard that will be needed for any vehicle to qualify for sale as zero-emission.

That minimum performance level will be ramped up as well. Currently, a ZEV that can go 50 miles on a single battery charge is acceptable. This will rise to 150 miles for combined city and highway driving, starting in 2026. The new rule also sets a durability standard of retaining 80% of a battery's certified range value for 10 years or 150,000 miles. Currently, manufacturers are only required to inform consumers of expected durability.

To support EV adoption, CARB noted that the state has budgeted $3.9 billion in the current fiscal year for building out EV infrastructure, and that Governor Gavin Newsom has proposed $6.9 billion for the next fiscal year.

The California New Car Dealers Association is skeptical the goals can be met. In a statement, it raised questions about the affordability of ZEVs for non-wealthy car buyers and the needed buildout of charging infrastructure. Even with financial incentives of the last decade, the trade association noted that the state "is consistently falling short" of ZEV sales goals that were set by CARB a decade ago.

Climate groups, on the other hand, said the plan isn't strong enough. The Union of Concerned Scientists called it "the minimum that's needed." The Center for Biological Diversity called it "a slow road to an all-electric future," and said it and other groups will push CARB to move its timetable up to 100% EVs by 2030. That's also the target date that ZETA has said is achievable nationwide.

The plan is now open for public comment, and CARB has scheduled a board hearing on 9 June to receive stakeholder input in-person.

Recent auto developments

Individual automakers declined to comment to Net-Zero Business Daily about the proposed California rule, instead referring to AAI's statement. But a look at recent developments shows how quickly they are shifting to EVs, a fact that CARB itself pointed out. CARB said that in model year 2021, 60 battery EV and plug-in EV models were available for sale in California.

Automakers' commitments have led S&P Global to forecast that as much as 44% of the US new car market in 2030 could be some form of an electric vehicle, and that number has been revised steadily upward, Lindsay said.

April marks one of the most highly promoted EV debuts: the Ford Lightning truck, which is a fully electric version of the best-selling Ford F-150 pickup. Annual sales of the F-Series pickup have averaged about 900,000, so converting even a share of those to electric will change the market, analysts say. Ford said it has 200,000 reservations for the truck, and it hopes to scale up production to 150,000 Lightnings per year in 2023.

As part of its plan to transition half of its sales to electric globally by 2030, Ford said in March it will invest $50 billion globally on EVs through 2026.

GM said in January 2021 that all of its light-duty vehicle sales in the US will be zero-emissions by 2035, and it's developing the Ultium platform for its battery EVs. Its $35 billion commitment through 2025 includes the January 2022 announcement of $7 billion dedicated to EV manufacturing at multiple plants in Michigan.

Toyota's BZ4X SUV EV debuted in the US market this month at the New York City Auto Show. The Prius hybrid electric car has been around for two decades, and a RAV4 EV was available in limited quantities, but it was not a specially designed EV.

The rollout of EV models by Toyota—the biggest automaker in the US by sales—will continue, as Toyota announced in January that it will invest $35 billion globally in battery EVs from 2022 through 2030.

Tesla's latest forecast, announced in January, is that it will deliver more than 1.4 million vehicles in 2022, up more than 50% from 2021, despite what CEO Elon Musk said is ongoing difficulties obtaining sufficient computer chips for the vehicles.

The latest data from the California Energy Commission, updated through the first quarter of 2022, show that more than 1.1 million EVs have been sold in the state cumulatively, of which about 70% are battery EVs.

Looking just at Q1 2022, California ZEV sales totaled 81,292. Tesla easily topped the list with its Model 3 registering 24,375 sales and its Model Y at 23,117 vehicles. Adding in all four of Tesla's models, the company accounted for 64% of all new California ZEVs through the first three months of 2022.

Posted 18 April 2022 by Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.