California prepares to sue feds after Senate revokes the state’s EV rule

California's Attorney General Rob Bonta announced the state will sue the federal government following a 51-44 Senate vote overturning California's waiver to set stricter vehicle emissions standards. The vote jeopardizes California's zero-emission vehicle (ZEV) mandate, which requires 100% ZEV new car and passenger truck sales by 2035, a target automakers have deemed "impossible" given current flat ZEV sales growth in 2024 after previous rapid growth from 2020-2023. The lawsuit challenges the use of the Congressional Review Act, which the Senate parliamentarian and the Government Accountability Office advised against using to revoke the waiver.

Analysis

California is initiating legal action against the federal government following a 51-44 Senate vote to overturn the state's long-standing waiver to set its own, stricter vehicle emissions standards, a right exercised over 100 times in the past 50 years. This federal action, which California's Attorney General Rob Bonta deems an "unlawful" and "reckless misuse of the Congressional Review Act," directly threatens the state's ambitious zero-emission vehicle (ZEV) mandate. This mandate aims for 35% of new light-duty vehicle sales to be ZEVs by 2026 – a target automakers have already described as "impossible" – and 100% by 2035. The legal challenge arises despite guidance from the Senate parliamentarian and the Government Accountability Office against using the CRA to revoke such waivers. The situation introduces significant regulatory uncertainty, particularly as 16 other states and the District of Columbia currently follow California's more stringent standards. Recent data indicates a potential softening in ZEV adoption, with California's ZEV sales growth reported as flat in 2024, following a significant rise from 7.8% of new sales in 2020 to 25.3% in 2023. This development, coupled with the existing industry skepticism about near-term targets, creates a complex outlook for the EV transition, which has largely relied on battery electric vehicles to meet these standards.

Key Decisions for Investors

• Investors in the automotive sector, particularly EV manufacturers and their supply chains, should closely monitor the outcome of California's lawsuit, as it will create substantial regulatory uncertainty and could materially impact ZEV sales projections and R&D timelines.
• Consider reassessing exposure to companies heavily reliant on the ZEV mandates in California and the 16 other adopting states, as a successful federal override could slow mandated EV adoption rates and increase compliance complexities or reduce their stringency.
• Factor in the existing challenges to EV adoption, such as automakers' expressed concerns over the feasibility of the 2026 targets and the reported flat ZEV sales growth in California during 2024, which may be exacerbated by this legal and political battle.