State ambitions confront federal limits: The new reality for California’s EV market
Julie Pearson
by Julie Pearson
Over 60 years ago the combination of the Golden State’s abundant sunlight and gases produced by the exponentially increasing number of internal combustion vehicle engines was identified as principally to blame for California’s notorious smog. To improve the state’s air quality, California secured a waiver from the US Environmental Protection Agency (EPA), allowing the state to enforce stricter emissions standards than the EPA’s nation-wide air-quality regulations. Beyond the early focus on reducing classic smog-forming pollutants, in the early 2000s, California relied on its EPA waiver to regulate carbon dioxide and other greenhouse gases emitted from new motor vehicles.
As of November 2022, California’s Advanced Clean Cars II (ACC II) programme required automakers to ensure that 80% of new vehicles sold in the state were zero-emission (ZEV) by 2035. Seventeen other states have adopted similar policies on light-duty vehicles, affecting nearly 40% of the US new vehicle market, and ten states have done so for heavy-duty vehicles.[1]
California sales of ZEV have risen steadily since 2018, reaching just over 1 million in 2022 to over 2 million in 2024. Reported ZEV sales were 25.3% of the state’s annual light-duty vehicle sales at the close of 2024.[2]
Early EV adopters fuelled this initial growth, as more affluent, environmentally motivated buyers were able to accommodate the challenges of limited charging infrastructure and higher vehicle costs. As that market sector became saturated, sales expanded, albeit more slowly, into mainstream, middle-income households, where concerns about purchase costs, EV range, and charging access were significant and often deal breakers.
On 13 June 2025, the current US federal administration revoked California’s EPA waiver, removing the state’s authority to enforce its own stricter standards. Additional federal legislation passed on 04 July 2025, causes the current federal clean vehicle tax credit (of USD 7,500) for new electric vehicle purchases to expire 30 September 2025, instead of December 2032.
Also, due to the sunsetting of federal authority permitting state-level exemptions, the California Clean Air Vehicle programme – allowing electric vehicles with single occupants to use High Occupancy Vehicle (HOV) or “carpool” lanes – will expire on 30 September 2025. Under federal highway funding mandates, HOV lanes are generally required to be restricted to multiple-rider use only, unless a specific federal exemption is in place.
Recently imposed tariffs on imports of automobiles, steel, and aluminium of up to 50% are intended to push more automotive manufacturing into the United States at the expense of Canada, Mexico, and China. However, those same tariffs are predicted to increase the cost of manufacturing automobiles in the US, which could lead to less innovation, more costly cars, and lower sales. Consequences of auto tariffs could also result in retaliation from countries including China, which has imposed reciprocal tariffs of 125% on all US exports. Global manufacturers’ products entering the US via Canada and Mexico to avoid tariffs, as well as investment in those countries as a base for global export instead of the US, could also result from those tariffs.[3]
Without authority to enforce its ACC II regulations, and the loss of the incentives of a federal consumer tax credit, or even HOV access, California is forced to rely on voluntary agreements with automakers, trucking and rail transport industries, and state subsidies to entice consumers to buy electric vehicles. So far in 2025, California’s ZEV sales growth appears to be slowing.
The overall trend globally, however, does suggest adoption of electric vehicle technology will continue to increase. The EV market is developing rapidly – more than 20% of all new cars sold worldwide in 2024 were electric. China’s share of electric car sales was nearly 2/3 of all sales in 2024. Global sales of EVs are expected to increase as much as 25% to nearly 20 million vehicles in 2025.
While the national and the global markets pursue record-breaking sales of electric vehicles, California is predicted to fall behind in the rapidly expanding EV market. Dealers and distributors remain concerned about the inadequate development of the state’s charging infrastructure, increased energy costs, and the significant capital investment required to expand to include or broaden EV offerings, all of which negatively affect the path to profitability.
By eliminating the so-called “EV Mandate”, the recent federal legislation provides significant, previously unavailable flexibility for vehicle dealerships and distributors to determine what types of automobiles they wish to sell. California dealers can tailor their vehicle offerings to market demand without the pressure of compliance with California’s more rigorous EV sales requirements. The recent changes easing air-quality regulations represent an opportunity for the interests of California’s car dealerships, but perhaps only a short-lived one.
[1] California, Washington, Oregon, Nevada, Colorado, New Mexico, Minnesota, Virginia, Washington, DC, Maryland, Delaware, New Jersey, Pennsylvania, New York, Connecticut, Rhode Island, Massachusetts, Vermont, and Maine. Source
[2] https://www.energy.ca.gov/data-reports/energy-almanac/zero-emission-vehicle-and-infrastructure-statistics-collection/new-zev
[3] https://www.brookings.edu/articles/the-impact-of-us-tariffs-on-north-american-auto-manufacturing-and-implications-for-usmca/
XLNC member firm Scali Rasmussen, PCLos Angeles, CA, USAT: +1 213 239 5622Legal, Corporate Finance
Julie S. Pearson is an experienced business litigator specializing in resolving complex commercial disputes. With a focus on automotive dealerships, luxury real estate, and high-net-worth entrepreneurs, she consistently delivers successful outcomes in contract, tort, and real property cases through settlement, trial, or arbitration. Contact Julie.
