The 2026-27 Budget: Proposed Zero-Emission Vehicle Incentive

analysis full 2026-27 BUDGET The 2026-27 Budget: Proposed Zero-Emission Vehicle Incentive Program GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2026 SUMMARY The Governor proposes a cumulative total of $200 million from the Greenhouse Gas Reduction Fund (GGRF) and the Air Pollution Control Fund (APCF), and associated budget trailer legislation, to create a new point-of-sale incentive program for light-duty zero-emission vehicles (ZEVs). The proposed new program aims to incentivize ZEV adoption by lowering the vehicles’ purchase price. Given other existing state programs aimed at reducing greenhouse gases (GHGs) and transitioning the state to cleaner transportation fuels, we find that the proposed incentive program does not address an urgent and critical need. Moreover, while fully evaluating the proposal is impossible given the lack of details on the program’s structure, the limited and one-time nature of the proposed funding makes it unlikely to have large effects on the marketplace or the state’s progress in meeting its ZEV adoption goals. Finally, we have concerns that the creation of a new program adds complexity and potential duplication. In light of these factors and the constrained state budget condition, we recommend the Legislature reject the proposal. Background For example, light-duty vehicles represent about 28 percent of statewide GHG emissions and State Trying to Meet Ambitious Climate 7 percent of statewide NOx emissions. To help Goals and Strict Air Pollution Requirements. the state meet its climate goals and air quality California has adopted a variety of goals related requirements, the Governor signed an Executive to reducing GHGs. Additionally, the state must Order in 2020 establishing various ZEV goals, meet requirements related to regional and local air including that 100 percent of in-state sales of new pollution. These include: passenger cars and trucks be zero emission by • State GHG Reduction Targets. California 2035. The California Air Resources Board (CARB) has established statutory goals for reducing subsequently adopted a regulation, Advanced statewide GHG emissions—down to at least Clean Cars II (ACC II), which required manufacturers 40 percent below the 1990 level by 2030, and to sell a growing share of their vehicles as ZEVs in to at least 85 percent below the 1990 level alignment with state goals. In May 2025, the U.S. by 2045. Congress passed a resolution rescinding the federal • Federal Air Quality Standards. California has waiver under which California had been allowed to two regions with the most critical air quality adopt ACC II. While State Attorney General Bonta challenges in the nation—the South Coast Air subsequently filed a lawsuit challenging the legality Basin and the San Joaquin Valley. The regions of the congressional revocation of this federal need to make substantial reductions in criteria waiver, the state’s ability to pursue its ZEV adoption pollutants from all sources—specifically, goals through ACC II requirements remains limited, nitrous oxides (NOx) and fine particulate at least until the lawsuit is resolved or federal matter—to meet federal air quality standards. policies change. Administration Set Ambitious ZEV Goals, State Has Made Significant Progress Which Federal Actions Have Called Into Encouraging Light-Duty ZEV Adoption. The Question. Mobile sources—including light-, state has made notable progress in pursuing its medium-, and heavy-duty vehicles—contribute ZEV adoption goals in recent years, with the share to California’s GHG emissions and air pollution. of new passenger vehicles sold in California that www.lao.ca.gov 1 analysis full 2026-27 BUDGET are ZEVs climbing from 8 percent in 2020 to over annually. Given this fiscal reality, we expect that the 20 percent in 2025. California significantly outpaces Legislature will need to make very difficult budget the nation in ZEV adoption. Nearly 30 percent of decisions in the years to come. all ZEV passenger vehicles sold nationwide are in Governor’s Proposal California, while the state is only home to about 12 percent of the U.S. population. Proposes $200 Million and Budget Trailer Legislation to Create New ZEV Incentive Federal Light-Duty Incentive Program Expired in Late September 2025. In recent Program. The Governor proposes $200 million on a one-time basis ($115 million from GGRF and years, the federal government has offered financial $85 million from APCF), along with associated incentives to encourage ZEV purchases. Most budget trailer legislation to create a new incentive recently, the federal Inflation Reduction Act program for light-duty ZEVs. The new program included a tax credit of up to $7,500 per vehicle would provide point-of-sale incentives for new for the purchase of new light-duty ZEVs and up and used vehicles, and the incentives would be to $4,000 per vehicle for the purchase of used administered by vehicle manufacturers. According light-duty ZEVs. In July 2025, the President signed to the administration, the incentives would be H.R. 1—also known as the One Big Beautiful provided on a first-come, first-serve basis and Bill Act—which eliminated these ZEV purchase would not be restricted based on household incentives as of the end of September 2025. Since income. The program is proposed to include various the passage of H.R. 1, some vehicle manufacturers limitations, however. For example, to participate in have signaled that they expect to scale back their the program, manufacturers would be required to previously planned production of ZEVs. match the incentive amount that is provided by the State Still Has Various Existing Programs state. Additionally, the incentives would only apply to Encourage ZEV Adoption. Despite the loss to first-time purchasers of ZEVs and to vehicles that of federal funds, the state still supports various do not exceed certain manufacturer’s suggested programs to subsidize the purchase of ZEVs. For retail prices, such as $55,000 for new sedans and example, in recent years, the state has supported $80,000 for new sport utility vehicles and light-duty the Driving Clean Assistance and regional Clean trucks. Under the proposal, other program Cars 4 All (CC4All) programs through periodic details—such as incentive amounts, the number budget appropriations. These programs provide of incentives to be provided, and the duration of income-qualified households with rebates toward the incentive program—would be determined by the purchase of ZEVs. Additionally, the state’s Low CARB through an expedited rulemaking process Carbon Fuel Standard (LCFS) program provides that would not be subject to the requirements of the funding to support various ZEV-incentive programs Administrative Procedures Act. offered to customers through utilities. In addition to the state programs that subsidize ZEV purchases, Assessment other programs subsidize the installation of Proposals Funded by GGRF and APCF charging infrastructure to further encourage Should Meet High Bar for Approval. In light of ZEV adoption. the state’s budget condition—and as we discuss State’s Multiyear Fiscal Condition is in greater detail in our recent publication, The Alarming. The Governor’s 2026-27 budget 2026-27 Budget: Framework for Approaching the proposal is only precariously balanced—and we Natural Resources, Environmental Protection, believe the risk of a stock market downturn is and Agriculture Budget—we recommend the elevated. If a downturn were to occur, it would Legislature apply a high bar to its review of new substantially worsen the state’s near-term budget proposals, including those supported by the picture. Moreover, even without a stock market General Fund or special funds, and limit new downturn, both our office and the administration spending to urgent or critical needs. We think expect the state to face multiyear deficits, with applying this principle broadly across all fund types estimates ranging from $20 billion to $35 billion is important because special funds can serve as 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET tools to help address the budget deficit, such as Key Program Details Are Lacking, Making by taking on expenditures previously funded by a Thorough Assessment Impossible… the General Fund or providing loans to the General The administration has not yet determined key Fund. For example, the Legislature has the option details on the proposed program’s structure, such of using monies from GGRF flexibly to support as the duration of the program, the number of any purpose. As such, GGRF could be thought incentives to be provided, or the amount of each of akin to the General Fund and therefore should incentive. The proposal anticipates that CARB will similarly be targeted for the state’s highest priorities decide upon these specifics through an expedited (whether within the environmental sector or other rulemaking process over the coming months. policy areas). Additionally, APCF potentially could The absence of specific information on the program be used to support some activities currently being structure makes it impossible for the Legislature to funded with GGRF, thereby freeing up those dollars understand how the program will work or evaluate to help fund other priorities. its costs and benefits. For example, without ZEV Proposal Does Not Meet High Bar for information on the proposed incentive amounts, New Expenditures. Addressing climate change the Legislature cannot determine whether the and air quality are longstanding state goals. incentives would be sufficient to meaningfully affect However, the state already has overarching behavior. Additionally, without understanding the programs—such as cap-and-invest and LCFS—that number of incentives that will be provided, the are aimed at helping ensure that the state continues Legislature does not know the number of purchases to make progress decarbonizing and shifting to that could potentially be encouraged—at least to cleaner transportation fuels. While ZEV-specific some degree—by the proposal. programs can play a role in augmenting the state’s …But Indications Suggest Proposal May Not broader programs—such as by making ZEVs Have Large Effect on ZEV Sales. Even without more accessible to low-income households and key program design information such as the helping to encourage the market to produce a incentive amounts or number of incentives that will greater number and variety of vehicles—they are be provided, the total amount of funding proposed less critical than they otherwise would be without makes it clear that the scope of the program is likely the “backstop” of those broader GHG-reducing to be relatively modest and short term. For example, programs. Moreover, given the time horizon over for illustrative purposes, even if we assume that which the public likely will phase in purchases of only half of last year’s ZEV purchases would qualify new ZEVs, providing financial incentives for their to receive rebates due to the program’s restrictions, adoption does not constitute an urgent need that we estimate that the proposed funding would must be funded this year. support incentives of just $1,000 per vehicle for State Does Not Have Fiscal Capacity one year. This incentive amount is quite modest to Backfill Federal Commitments. The given current vehicle costs, which average about administration indicates that the impetus for this $50,000 for new vehicles and $25,000 for used proposal is to partially backfill the recent loss of vehicles. (ZEVs typically cost several thousand federal incentive funding. However, the state is dollars more to purchase than conventional facing the loss of federal funds across a variety vehicles). While the proposal attempts to magnify of areas and does not have the fiscal capacity to the potential effect of incentives by requiring backfill them across the board. For example, given manufacturers to provide a dollar-for-dollar match, the state’s fiscal limitations, the administration is the incentive amount likely still would be relatively not proposing to backfill the loss of federal funds in small. Moreover, given the opaque nature of vehicle many other areas of the budget, such as health and pricing, we expect that ensuring that incentives are human services. The rationale for treating this ZEV passed on to consumers, rather than retained (at program as a higher priority for backfill relative to least to some degree) by manufacturers or vehicle those other areas is not clear. dealers, will be difficult. In theory, one potentially helpful effect of vehicle incentive programs broadly www.lao.ca.gov 3 analysis full 2026-27 BUDGET could be to induce vehicle manufacturers to Climate Policies—Transportation, such challenges produce a greater number and selection of ZEVs. can include (1) program interactions that can However, doing so likely would require a much affect cost-effectiveness, (2) difficulty evaluating larger and/or longer-term investment than what the programs, (3) potential lack of program Governor is proposing (or what the state realistically coordination, and (4) increased administrative costs. could provide, given its budget limitations). Recommendation Proposal Could Result in Program Duplication. As noted above, even with the Reject Proposal. We recommend the Legislature reject the Governor’s proposal to loss of the federal incentive program, the state create a new light-duty ZEV incentive program, supports various other ZEV incentive programs. as it does not meet the high bar we recommend We note that some of these programs currently applying to new proposals. Particularly in light of are running low on funding. For example, the other existing state programs aimed at reducing administration estimates that the majority of the GHGs and transitioning the state to cleaner $72 million left in the regional CC4A program as transportation fuels, we find that the proposed of January 2026 will be exhausted before the incentive program does not address an urgent and end of 2026-27. The administration has not yet critical need. Moreover, while fully evaluating the determined the extent to which this new proposed merits of the proposal is not possible given the program could be used in combination with other lack of details on its structure, the limited, one-time existing programs (sometimes referred to as nature of the proposed funding makes it unlikely “stacking”). However, given the number of existing to have large effects on the marketplace or on the programs and policies aimed at incentivizing state’s progress in meeting its ZEV adoption goals. ZEVs, a potential for duplication exists, which Finally, we have concerns that the creation of a new would create challenges. As we discuss in our program adds complexity and potential duplication. December 2018 report, Assessing California’s LAO PUBLICATIONS This report was prepared by Helen Kerstein, and reviewed by Rachel Ehlers and Ross Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 4 LEGISLATIVE ANALYST’S OFFICE