California And China’s Secret Weapon On Transportation Electrification

Car market heavyweights China and California are leading the world’s transition to electric vehicles (EVs), and their ambition will have an outsized impact on transportation electrification due to their market size and policy influence.

Policymakers in both jurisdictions share a secret weapon in their drive to decarbonize transportation: the zero-emission vehicle (ZEV) sales standard.

ZEV standards require automakers to increase their percentages of ZEV sales over time, providing industry the confidence it needs to invest in the EV supply chain, building demand by increasing consumer options and hastening learning curve benefits, ultimately delivering more clean cars at lower cost.

California proposed the first ZEV standard in 1990, and it was later adapted by Chinese policymakers, who have governed the world’s largest national market since 2009. China’s EV sales have exceeded all others since 2014. California leads the U.S. market, the second largest globally, in both total new car and EV sales.

In 2022, EV sales in China are expected to hit about 25% of all new light-duty vehicles sales, driving this year’s total EV sales to more than six million units. Meanwhile, U.S. EV sales have lagged those in China and Europe, but the U.S. is narrowing the gap. California EV sales represent roughly half of the U.S. total, and jumped from 13% in 2021 to 18% through the third quarter of 2022.

California’s policy ripple effects

In August 2022, California established the most ambitious, detailed ZEV transition plan implemented anywhere. The state’s advanced clean cars policy puts it on course to achieve 100% zero-emission passenger car sales by 2035.

California’s automarket influence is turbocharged by policies developed and implemented by its Air Resources Board. The state’s unique ability to set higher vehicle standards than the federal government is especially important, because other states are empowered to voluntarily adopt them, as have 15 states—representing 36% of the U.S. market.

California’s original ZEV sales standard covered cars and SUVs, but in 2020, its Air Resources Board broke new ground by adopting the Advanced Clean Trucks policy addressing the full range of commercial vehicles including heavy-duty tractor trailers.

The state is expected to continue its heavy-duty policy innovation next year by adopting an Advanced Clean Fleets rule. This policy will phase in ZEV purchase requirements for larger commercial fleet operators, pioneering a new approach to supporting the demand side of market transformation. The Advanced Clean Fleets rule offers an advantage over purchase incentives by freeing up public revenue for other zero-emission vehicle investments.

California policy’s direct connection to Tesla’s success

Thanks in large part to California’s policies, EVs have emerged as a leading export while the state’s direct auto manufacturing jobs have grown to about 20,000, doubling compared to historical levels. California’s ZEV sales standard is also directly linked to Tesla’s success by providing more than two-thirds of the company’s total monetary support. The ZEV sales standard has provided an estimated $2.48 billion in monetary support for Tesla out of $3.2 billion from the California program’s overall since 2009.

California’s ZEV sales provided a timely, early source of cashflow, pushing Tesla into profitability in some quarters. Policy experts and financial analysts alike credit the ZEV policy with drawing Tesla to the state and providing income at crucial early junctures. In fact, cashflow due to Tesla’s sale of ZEV credits flipped the company’s balance sheet from red to black during its initial growth, without which Tesla would have likely folded. Dan Sperling, founding director of the Institute for Transportation Studies at the University of California, Davis, and member of the Air Resources Board, expresses a similar view: “Tesla would have gone bankrupt and disappeared without California’s ZEV mandate.”

Though the connection to Tesla’s success may be most striking, the ZEV rule benefits all EV makers, who likewise receive marketable ZEV credits. The policy is implemented as a flexible performance standard and companies receive ZEV credits if they exceed the average requirement, as all EV makers will, owing to their cars’ zero tailpipe emissions.

Connecting China’s ZEV sales standard to its EV market’s meteoric rise

Dialogue among China and California policymakers and researchers, dating back to the 1980s, including work by Lawrence Berkeley National Laboratory’s China Energy Group, helped China’s create its own ZEV policy following the California’s ZEV standard model.

China’s ZEV standard, known as the “New Energy Vehicle Sales Standards,” is a pillar of its market transition strategy. The International Council for Clean Transportation identifies China’s new energy vehicle sale requirement as the “main driver” of the country’s rapid EV market growth.

China and California’s ZEV sales standards are part of a broader portfolio of clean vehicle policies. Both places include two types of new vehicle standards, ZEV sales and tailpipe greenhouse gas emissions standards – a powerful combination. Sales standards send a simpler and robust signal on the pace of the transition to ZEVs while tailpipe standards ensure no backsliding on internal combustion engine efficiency.

Economic promise fuels a policy shift

Remarkable momentum is moving passenger EVs forward supported by consumer economic trends, growing government commitments, and increasing automaker enthusiasm. Growing industry support is demonstrated by increasing automaker announcements on sales or production targets for EVs, including commitments by Volvo (100% EV sales by 2030), Ford (50% EV sales by 2030), and BMW (50% EV sales by 2030). General MotorsGM
and Volkswagen have also committed to achieve carbon neutrality by 2040.

These automaker commitments are backed up by growing EV assembly and parts investments, which will reach $90 billion this year, up 45% from 2021. Meanwhile, forward-looking investment plans have doubled globally over the past two years. In 2022, automakers announced $526 billion in planned EV five-year investments, compared to $233 billion in planned five-year EV investments announced in 2020.

Two policies for reaching the transportation decarbonization finish line in time

It’s clear EVs will displace internal combustion engines as the preferred motor vehicle technology over the next decade. The extraordinary tailwinds propelling EV sales create potential for a surprisingly fast transition to EVs dominating the mainstream market.

The U.S. and 10 other countries added to this momentum by recently joining the Global Commercial Vehicle Drive to Zero Memorandum of Understanding (MOU) at the COP27 international climate talks, committing signatories to 30% heavy-duty commercial ZEV sales by 2030 and 100% by 2040.

But despite this progress, International Energy Agency (IEA) modeling and other studies indicate current global ZEV policies are not on track for net-zero emissions. To cut auto emissions in line with a safe climate, policymakers in the world’s largest auto markets must adopt stronger policies guided by two principles.

First, policymakers should increase ambition. Drawing on IEA net-zero modeling and other studies, policymakers should aim for ZEV shares for light-duty vehicles of at least 65% by 2030 on the way to 100% by 2035. For heavy-duty vehicles, policy should aim for a minimum of 30% by 2030 on the way to 100% sales by 2040.

Second, policymakers should build a portfolio of policies centered on new vehicle standards, including both ZEV sales and tailpipe emissions standards if possible. An effective clean vehicle policy portfolio should also include investment in public charging infrastructure and equity-targeted incentives that can broaden EV accessibility to lower income households.

The EV transition is not on-track to hit net-zero emissions by 2050, but ZEV standards as part of a portfolio strategy can put it in the fast lane. Succeeding will require increased national commitments, followed quickly by policy design and implementation. Considering the available public health and economic benefits, accelerating the EV transition consistent with a net-zero emissions pathway should be a priority for transportation policymakers in every nation.