California Takes the Lead With EV Adoption

Sales of internal combustion vehicles are already in decline, having peaked in 2017. That’s good news for electric vehicle (EV) companies, but it will take more than the slow death of internal combustion vehicles to help juice North American EV sales.

On that front, California recently put the pedal to the metal. In August, the California Air Resources Board (CARB) passed a measure banning the sale of new cars and light trucks that run solely on gasoline by 2035. (Source: “California Moves to Accelerate to 100% New Zero-Emission Vehicle Sales by 2035,” California Air Resources Board, August 25, 2022.)

It’ll take a lot of effort to get there. Currently, roughly 16% of all new vehicle sales in the Golden State are zero-emission.

The new rule states that, by 2026, 35% of all passenger cars and light trucks sold in California must be either zero-emission, hybrid plug-in, or hydrogen-powered. That represents a 118% increase in EV sales in just four years. By 2030, that figure is meant to rise to 68%, and by 2035, it's supposed to climb to 100%.

Californians won’t technically be forced to buy an EV by 2035, but the state has created fines for automakers to deter them from producing internal combustion vehicles. Not only that, but California has a history of actually enforcing its rules.

California's rules only apply to new vehicles, not used ones.

14 Other U.S. States Set to Follow California’s Initiative

Like it or not, in many ways, as California goes, so too goes America. If California were its own country, it would be the 10th-largest automobile market in the world. So, automakers are pretty much willing to do what California wants, and other states are influenced by what California does.

Currently, 14 other states (plus D.C.) have agreed to follow the emissions policies set forth by CARB: Colorado, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington. (Source: “California’s New Emissions Rule Speeds Up the Future of Cars,” The Washington Post, August 29, 2022.)

If these states agree to the 2035 mandate, they'll cover more than one-third of all new vehicle sales in the U.S. Other states are also thinking of becoming CARB-compliant, including Minnesota, Nevada, and New Mexico.

Suffice it to say, a target audience of that magnitude could force automakers to change their manufacturing processes. Selling EVs just to California, other CARB-compliant states, and states that follow federal standards would be logistically difficult and cost-prohibitive for automakers. Therefore, it would make sense to produce EVs for other markets as well.

Case in point, Volkswagen has said it will stop selling internal combustion cars in Norway before it's legally required to do so by law. Norway, with a population of 5.4 million, is a significantly smaller market than California, which has a population of 39.5 million. (Source: “Volkswagen Will Sell Only EVs in Norway From 2024,” The Driven, August 23, 2022.)

Automakers that have said they support California’s right to set its own emissions rules include Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM), Honda Motor Co Ltd (NYSE:HMC), and Toyota Motor Co (NYSE:TM). (Source: “Toyota Recognizes California Authority to Set Vehicle Emissions Standards,” Reuters, August 23, 202.)

Chances are pretty good that auto companies will want to continue selling their vehicles in California over the coming years, which means it's likely that the rest of the U.S. will need to follow suit.

EV Charging Stocks Could Be Biggest Winners

The expiration date of 2035 for new internal combustion vehicle sales in California will not only be a boon for EV manufacturers, but also for companies that support the EV industry.

This includes companies that mine for rare earth minerals, make EV batteries, and make EV chargers.

Right now, there are 73,000 EV charging ports in California, but that number will need to reach 1.2 million by 2030. (Source: “Report Shows California Needs 1.2 Million Electric Vehicle Chargers by 2030,” California Energy Commission, June 9, 2021.)

An additional 157,000 EV chargers will be needed in California by 2030 to support 180,000 medium-duty and heavy-duty electric trucks and buses that are expected to be on California's roads. Keep in mind, those numbers were forecast more than a year before California announced its 2035 deadline for ending new internal combustion vehicle sales.

Analyst Take

California has taken its foot off the gas and has juiced the adoption of EVs. As the largest auto market in the U.S., it's not a stretch to say the rest of the country will follow California’s lead. California and other CARB member states account for such a massive percentage of vehicle sales that automakers won't want to build two separate kinds of vehicles.

EV stocks will obviously be some of the biggest winners from this trend, but EV battery stocks, lithium stocks, battery charging stocks, and smart-car technology stocks will also benefit.