Why a California Ban on Internal Combustion Is Irrelevant

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Following China’s proposed ban of the internal combustion engine by 2030, Governor Jerry Brown of California appears to have gotten a little jealous. He is now reportedly interested in eventually banning all fossil fuel vehicles from California.

The question investors are now asking themselves is whether this ban force Ford Motor Co. (NYSE: F), General Motors Co, (NYSE: GM) and others to do an about-face and go full electric?

The short answer is no, because these sorts of government proposals don’t mean much practically. They have little practical effect besides gathering votes for the next election from those worried about climate change. Why?

Realistically speaking, no government can impose extreme economic change on its entire territory overnight or even quickly, which is why China is waiting until 2030 (at least for now) and why the United Kingdom is supposedly waiting until 2040 on these policy proposals. This is another way of government central planners making themselves look prudent and wise, while really all they’re doing is biding time for the free market to develop the alternative energy vehicle industry to such a point that the ban on fossil fuel transportation would be hopefully, largely inconsequential.

It’s the same reason minimum wages are never jacked up quickly overnight. The resulting unemployment would be obvious to all. By the time higher minimum wages take effect, government hopes that inflation will kick in to bring nominal wages up anyway.

The bottom line being, if the electric and fuel cell vehicle industries are not economical by the time 2030 or 2040 rolls around, no government will have any chance of successfully banning fossil fuel cars by those dates without severely impacting their economies. So each government is picking respective dates for when their current advisers imagine that fossil fuels will no longer be more cost efficient than alternative fuels. These loose “deadlines” in other words are mostly just predictions by government advisers for when they think fossil fuels will be mostly phased out by market forces anyway.

Another factor is that the environmental costs of electric vehicles and hydrogen fuel cells are still largely unknown. They could turn out to be worse than we thought, for example if mining for rare earths metals to fuel battery demand causes too much environmental damage, or if emitting extra water vapor into the atmosphere from fuel cell cars actually contributes to climate change more than carbon dioxide.

Is there anything practical that governments are even saying when they propose to ban sales of internal combustion vehicles by a certain date? Nothing more than saying that they will ban an outdated industry if indeed it becomes outdated by a certain date. In such a case though, banning sales of an outdated product does not change things all that much.

A proposed ban also hints that governments will actively subsidize the alternative energy industry, which they have done plenty of already anyway, so nothing new there. Essentially then, there isn’t much added information in California’s long-range proposal, nor in China’s or the United Kingdom’s, other than to say that these governments hope that alternative fuel cars will be fully viable by these respective dates.