Electric vehicles just had a watershed week in the U.S.

The U.S. may have just experienced a watershed moment in the transition to electric vehicles (EVs). In a little more than a week, the U.S. federal government and state officials in California made two moves that could dramatically shape the course of EV adoption for years to come. Here’s what happened and why a Scandinavian country may be able to offer clues about what lies ahead for the American automotive market.

California bans gas vehicle sales

In August, the California Air Resources Board (CARB) announced new rules that would require “35% of new cars sold by 2026 must be gas-free, 68% of cars sold by 2030 must be gas-free, and by 2035, 100% of new cars sold must be gas-free.” The decision to ban sales of new gas-powered vehicles is being motivated by environmental concerns, with state officials saying the move “will lead to a 50% reduction in pollution from cars and light trucks by 2040.” The ban will not affect cars already on the road, only new vehicle sales.

California is home to more than 39 million people and would be the fifth largest economy in the world if it were its own country, ahead of India and the United Kingdom. New vehicle registrations in the state were predicted to reach 1.85 million for 2021, and while California has the highest rate of EV adoption in the U.S. (6% of new registrations in 2021), those vehicles still only represent 2% of the total cars on California roads. Given the size of California’s vehicle market and the influence the state has on environmental protection policies nationally, the move could be a significant turning point in the use of EVs.

Inflation Reduction Act expands EV tax credits

The news in California came a little more than a week before President Biden signed the Inflation Reduction Act, which provides new tax credits for purchases of EVs. The bill includes a $7,500 tax credit for sales of new EVs, and a $4,000 tax credit for used EVs. The incentive for used vehicles is new while some credits for new EV sales already existed.

These credits come with strings, however. They are available only to buyers below certain income thresholds, on vehicles below certain prices, and that are manufactured in North America. It’s a policy focused on bringing EVs to the mainstream and boosting the domestic auto industry and supply chain. Wealthy buyers of luxury EVs manufactured overseas need not apply.

The move is significant given that price is always a major factor for consumers when considering vehicle purchases, and particularly now as supply chain issues have pushed vehicle prices increasingly higher. Similar incentive policies in other countries have proven successful in accelerating EV adoption, offering both lessons and insights into what to expect from the U.S. market.

What we can learn from Norway

In 2020, Norway confirmed plans to ban all sales of gas-powered vehicles by 2025, which would make it the first country in the world to do so. By all accounts, they have achieved their goal well ahead of schedule.

Recent sales data show that EVs and hybrids have captured virtually all new vehicle registrations in Norway in 2022, years ahead of the target date. Growth of the EV market in Norway is credited to both strong tax incentives for EVs and natural market forces. Norway suspended the standard 25% VAT applied to new vehicles for EVs, meaning that a consumer could buy a high-performance electric BMW i4 M50 with more than 500 hp for quite a bit less than a base BMW 3 Series gas-powered model. Additionally, Norwegian EV owners enjoy free parking and access to freeway carpool lanes. With these powerful incentives, consumers’ preferences quickly changed to hybrids and full EVs. Car dealers don’t order vehicles they soon won’t be able to sell, and consumers don’t want to be the last one to buy a gas guzzler. With all these influences coming together, the market for new vehicles completely flipped within a few short years.

Norway did not pass an outright ban on gas-powered vehicles, and the approach has been persuasion, not a government mandate. What this tells us is that if the right incentive structure is in place, the transition to EVs can happen surprisingly quickly. The question is, can the same dynamics transfer to the U.S. market and will automotive manufacturers be able to keep up?

Preparing for the new EV era

Proponents of electric vehicles will no doubt be pleased by the actions taken by California and the federal government. But delivering the sheer volume of EVs needed to meet the expected demand will be no easy feat. Automotive suppliers and OEMs will have to add capacity in North America while finding ways to become more efficient and avoid the supply chain issue hiding in plain sight. However, this week’s moves have likely significantly advanced the U.S. transition to EVs and given a big boost to achieving climate-friendly emission reductions.

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