Big Gov Strikes Again: California vs. the Car Industry

Typical California traffic, which is bad

For a long time, the state of California has called its own shots. Given its large population, California carries a great deal of weight in consumer markets. If a market trend takes off there, the chances of it spreading throughout the nation is quite high. There’s a reason so many technology firms choose California despite it no longer being one of the best states for startups. But this same influence businesses enjoy in California is the same one that can come back to bite them. This is especially true when state policies try to force change before a market is ready. And that’s precisely what seems to be happening with California’s electric vehicle law that will soon ban gasoline-powered vehicles.

(Which states are best for startups? Bold has a list for you.)

Recently, the California Air Resource Board adopted a new policy designed to accelerate electric car adoption. In essence, the policy progressively requires automakers to only offer electric vehicles as new purchases after 2035. Though California’s ban on gas cars after this only applies to new car purchases, its effect is nonetheless tremendous. While the motivations may be positive in relation to climate change, numerous challenges exist. And one of the most notable ones involve secondary market effects from California’s electric vehicle law. Rather than having a positive influence, the policy has just the opposite if supply and demand fail to match.

“It’s a hell of a way to set transportation policy. It has pretty significant consequences for consumers and the supply chain.” – Scott Segal, Partner at Bracewell LLP

California’s Electric Car Law

The policies set forth by California’s Air Resource Board establish a series of milestones that automakers need to meet. By 2026, the percentage of new vehicles that are electric must be 35% or more. This figure then increases to 68% by 2030 before finally requiring 100% electric care by 2035. What if automakers fail to comply? For every car sold over the assigned quote that’s not electric, a $20,000 fine is applied. Given that the state is one of the largest car consumer markets, California’s ban on gas cars has automakers’ attention. But despite a willingness to comply, many fear the milestones are simply not feasible.

It should be noted that California’s electric car law does allow automakers to sell up to 20% of these new cars as hybrids. Likewise, if automakers make early gains over the stated milestones, they can bank their surplus in years ahead. But the biggest concern for automakers is the tendency for other states to follow California’s lead. Many expect that up to 15 other states will soon adopt a similar policy to California’s ban on gas cars. Naturally, these ripple effects create an even bigger challenge for automakers in their endeavors. In essence, California’s electric car law may likely invite government involvement in car markets across the country.

“Whether or not these requirements are realistic or achievable is directly linked to external factors like inflation, charging and fuel infrastructure, supply chains, labor, critical mineral availability and pricing, and the ongoing semiconductor shortage.” – John Bozzella, President and CEO of the Alliance for Automotive Innovation

Major Challenges Ahead for Compliance

In looking at California’s electric car law, it’s essential to examine the overall electric car market currently. Without question, there is a significant consumer demand for these cars. Both Ford Motors and Tesla have waiting lists for their vehicles. But demand doesn’t necessarily extend to most Americans. Compared to the average cost of a new gasoline-powered car, which is about $48,000, new electric cars average $66,000. Even with the incentives for electric car purchases under the Inflation Reduction Act, demand may falter. If that’s the case, the California’s ban on gas cars may actually raise used car costs and make it harder on Americans. These are the kind of worries that many have when government starts interfering with market forces.

An electric car being charged by something blue
California’s electric car law is great for electric cars and bad for gas-powered cars… and bad for business.

Of course, this is just one set of issues posing challenges for California’s ban on gas cars. Another major one involves infrastructure and supply chain issues. In order for California’s electric car law to work, the state will need to significantly boost public charging stations. Estimates suggest it will need 1.9 million more by 2035 to meet needs linked to policy objectives. Likewise, supply chains for electric cars are formidable. Automakers already face issues with traditional vehicles related to supply chain bottleneck. This explains in part why prices have skyrocketed. But these issues are even more significant for electric cars. Specifically, scarcity of key resources like Cobalt, Nickel and Lithium for battery manufacturing exists. If these problems persist, then meeting California’s electric car law milestones will be extremely difficult.

“Right now, automakers can sell as many as they make. The bigger question is whether they can actually produce enough cars!” – Gil Tal, Transportation Expert, University of California, Davis

Not Just Too Much and Too Soon, But Too Far

When it comes to California’s electric car law, the state has some permissions other states do not. Based on its population size and air pollution issues, California has been granted a waiver regarding environmental policies. In essence, it allows the state to impose greater restrictions in areas deemed to potential affect their climate. As such, the EPA must sign off on California’s ban on gas cars. Even if this occurs, there’s no guarantee that consumers will suddenly flock to this new market. Some states may also challenge California’s electric car law legally, fearing the state’s broader influence. Nothing is set in stone just yet.

One thing is evident, however. The state did not have to go to these extremes to achieve progressive goals in renewable energies. Other countries have achieved remarkable consumer conversions to electric vehicles with the use of incentives alone. By encouraging the market instead of creating enforcements, countries like Norway have made significant progress. Financial and tax incentives have now led to 80% of consumers driving electric cars. By taking a less forceful approach, countries like Norway allow market forces to direct change. And these same incentives tapped into business innovation and creativity to solve issues proactively rather than being fined or coerced. Whether California’s ban on gas cars’ experiment works or not will eventually be determined. But generally, it’s never good to restrain the ingenuity of the markets and business’ ability to navigate them.

 

The government wants your whipped cream–can you believe it?

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