Possible Market Implications of California’s Efforts to Ban Internal Combustion Engines
May 31, 2022
In accordance with California Governor Gavin Newsom’s Zero-Emission By 2035 Executive Order, the California Air Resources Board (CARB) is developing a ban on the sale of new internal combustion engine (ICE) vehicles by 2035. The goals of this ban are to promote clean air in the state and to mitigate climate change. Stillwater’s recent analysis, Possible Market Implications of California’s Efforts to Ban Internal Combustion Engines, evaluates the two scenarios in CARB’s 2020 Draft Mobile Source Strategy (MSS). These scenarios include:
- Baseline – A Realistic Projected Demand of historic growth rates for the ZEV population reaching 3.0 million by 2035.
- 2035 ICE Ban – An “illustrative scenario” which assumes California successfully bans the sale of ICE vehicles by 2035. This scenario is used for policy planning and provoking conversation but is not plausible based on Stillwater’s analysis.
To provide a case to contrast with the 2035 ICE Ban Scenario, Stillwater also projected our best estimate of a market-feasible ZEV migration. Stillwater’s Projected Demand Scenario is essentially the same as CARB’s MSS Baseline scenario.
To determine the potential impact of a successful ICE Ban under the 2035 ICE Ban scenario, we evaluated the impact on various stakeholders. We find:
- Gasoline demand declines by 66% and 90% and diesel demand declines by 34% and 60% by 2035 and 2050, respectively.
- These declines could eliminate California’s petroleum refining industry by 2050 and reduce retail fueling sites in California that number over 10,000 today by roughly 50% by 2035 and over 80% by 2050.
- Operators of ICE vehicles will have to travel farther to reach fueling sites and possibly pay considerably more to cover the additional costs of supply that are likely on the order of $0.35 per gallon in 2035 and $0.90 per gallon in 2050. In addition, increased costs of California’s Low Carbon Fuel Standard (LCFS) and Cap and Trade (C&T) programs will add another $1.35 and $3.37 per gallon to the cost to manufacture fuels in 2035 and 2050, respectively. This brings the total added cost in those two years to $1.70 and $4.27 per gallon, respectively.
- The operators of the dwindling and aging ICE fleet after 2035 are most likely to be those families with low incomes who do not generally purchase new cars and cannot afford the higher cost of EVs.
- State and local tax revenues on the sale of these fuels, which are generally targeted to maintaining transportation infrastructure such as roads, will be reduced by $9 billion per year by 2035 and over $14 billion per year by 2050.
- The adoption rate of ZEVs assumed in CARB’s 2035 ICE Ban scenario is significantly faster than historical precedent suggests is feasible and results in a much greater decrease in fossil fuel demand than is likely.
Under Stillwater’s Projected Demand scenario, ZEV populations would displace 0.5 billion gallons per year (BGY) of diesel and 1.0 to 1.5 BGY of gasoline by 2035, far less than the number stated in CARB’s 2035 ICE Ban Scenario. However, other factors considered in our analysis result in actual demand for diesel to increase by 0.5 BGY and gasoline demand to decrease by over 2 BGY by 2035. This results in the costs added to gasoline and diesel projected to be much lower than the ICE Ban Scenario. This analysis also results in state revenues from taxes and fees declining by $1.5 billion per year by 2050, but revenues from the C&T program increasing dramatically, assuming the program remains in place in its current form.
CARB states their 2035 ICE Ban Scenario does not “reflect a market feasibility analysis.” Stillwater concurs that this scenario overestimates ZEV penetration as it is estimated to be 4.7 times faster than current evidence supports. The costs and demand destruction summarized above are unlikely to be realized. CARB’s more realistic Baseline scenario of 3.2 million ZEVs by 2035 is consistent with recent history.