In a sweeping policy change to combat climate crisis, the governor of California, Gavin Newsom signed an executive order that bans the sale of new internal combustion engine (ICE) cars effective 2035. With this, California becomes the first American state to enforce such aggressive emission targets, which would further accelerate the auto industry’s roadmap to transition to electric vehicles (EVs). The state’s decision to pull the plug on gas-powered vehicles certainly intensifies EV competition.
California Spearheads Decarbonization Efforts
One of the leading economies in the world, California has always had a steadfast approach to tackle global warming and did come up with some of the most aggressive climate policies. The country has in place ambitious targets of reducing greenhouse gases by 40% from 1990 levels by 2030 and 80% within 2050. California aims to generate 60% electricity from solar, wind and other zero-carbon sources by 2030 and 100% within 2045.
Notably, California is the largest car market in the United States. Per IHS Markit data, more than 11% of all light vehicles in the United States were registered in California in 2019. Transportation contributes to 40% of California’s greenhouse gas emissions. Notably, green vehicles accounted for just 6.2% of the total cars sold in California, which surpassed the U.S. share of 1.6%. Through first-half 2020, less than 8% of the new vehicles registered in California were electric. With the latest order that requires 100% new car sales to be electric in 15 years, California emerges as a major trendsetter for other like-minded states to follow suit.
In addition to imposing new standards for automakers, California aims to significantly expand its charging infrastructure and is also likely to boost financial incentives to make EVs more accessible. State regulators are also working on a rule that could mandate ride-sharing firms like Uber and Lyft to transition to green vehicles. The latest executive order would build on California’s existing vehicle policies. In June, California mandated that more than half of all trucks and vans sold in the state should be emission free by 2035.California led a regulatory revolt against the rollback of emission standards by the U.S. President Trump and still stands its ground by vowing to stricter environmental regulations.
Stringent emission rules in Europe and China in a bid reduce carbon footprint are radically changing the business dynamics of auto manufacturers, as they are trying to emerge from the coronavirus pandemic. Per the latest report by European Commission, EU targets to slash CO2 emissions by at least 55% by 2030 from 1990 levels, which will likely put it on a balanced pathway to reach carbon neutrality by 2050. A couple of days back, China’s President Xi Jinping pledged that the country would become carbon neutral by 2060.
EV Race to Gain Pace
The California ban and similar moves by other countries could be a tipping point and would automatically limit ICE car choices for consumers, leading to widespread adoption of electric cars in the coming years. Automakers around the world are fast stepping up their electrification efforts.
While Tesla TSLA has a first-mover advantage in the EV space with high range vehicles, superior technology and software edge, major U.S. auto biggies including General Motors GM and Ford F are on a spree to revolutionize the EV space. General Motors’ Ultium modular battery platform and strategic collaborations with Honda, EVgo, Nikola and Uber are buoying its e-mobility game. Ford is also committed to spend more than $11.5 billion in EVs through 2022 by introducing zero-emission versions of some of the company’s popular vehicles. While General Motors currently sports a Zacks Rank #1 (Strong Buy), Ford carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
European auto biggies including Volkswagen VWAGY, Daimler AG DDAIF and BMW AG BAMXF are increasingly ramping up investments to develop and market green vehicles. In July, BMW’s CEO laid out targets to slash carbon emissions per kilometer driven by 40%. In the next 10 years, 7 million BMW EVs are likely to hit the road.
The car industry seems to be increasingly pivoted toward EVs. Amid rising climate concerns, investors are also intrigued by automakers that look for solutions to lower global carbon emissions for providing a cleaner energy future.Lately, IPO filings by green vehicle makers — including Nikola, Li Auto, Hyliion and Fisker — have been on the rise to capitalize on the EV frenzy.
Califonia's move to phase out the sale of new gasoline-powered cars statewide by 2035 further upends the auto industry and the 2035 deadline gives fuel suppliers, auto manufacturers, and fleet managers a real target to work toward.
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