June 4 (Bloomberg) -- Toyota Motor Corp., ranked as the U.S. market’s most fuel-efficient automaker, may have to spend more than $1 billion to meet California’s requirement for zero- emission cars, said a person familiar with the matter.

Toyota and Honda Motor Co. have the biggest market share in the state and starting with 2012 models must sell the most vehicles that don’t pollute, according to California law. The rule requires 3 percent of unit sales over a three-year period to be non-polluting models.

California’s requirement for plug-ins and zero-pollution models applies only to companies that sell at least 60,000 vehicles a year in the state. Plummeting sales in California for bankrupt General Motors Corp. and Chrysler LLC mean their costs of compliance will be reduced owing to the lower volume.

“The targets of the rule initially would have been GM, Ford and Chrysler because of all their trucks, not Honda and Toyota, which are kind of the environmental darlings,” said Jim Hossack, an analyst at consulting firm AutoPacific Inc. in Tustin, California. “It’s ironic those two companies could take the biggest hit.”

Toyota sold 24.1 percent of new autos in the state in the first quarter of 2009, ahead of Honda’s 12.9 percent market share, according to the California New Car Dealers Association. Ford Motor Co. was third with 12.1 percent, followed by Nissan Motor Co. at 10.9 percent and GM at 10.4 percent.

Toyota’s American depositary receipts rose 70 cents to $79.64 at 4:15 p.m. in New York Stock Exchange composite trading and have gained 22 percent this year. The carmaker’s shares in Tokyo fell 0.5 percent to 3,810 yen.

All Costs

“If you’re only discussing the cost of batteries and other components, a $1 billion cost for Toyota may be a stretch,” said Brett Smith, an advanced-vehicle analyst at the Center for Automotive Research in Ann Arbor, Michigan.

“Add in all the things needed to support these vehicles -- service, dealer training, marketing, warranties, new manufacturing equipment to get them into production, and that number sounds reasonable,” Smith said.

The state, which accounts for about 12 percent of new autos sold in the U.S., requires the sale of advanced technology models because of persistent air-pollution problems. Carmakers must sell a combined 7,500 hydrogen fuel-cell or battery- electric vehicles and more than 60,000 plug-in hybrids in model years 2012 through 2014, said Anna Gromis, an air-pollution specialist with California’s Air Resources Board.

“There’s going to be a large cost premium for this technology,” said John Hanson, a spokesman for Toyota’s U.S. sales unit in Torrance, California, who declined to comment on the $1 billion estimate. “We don’t know yet how many consumers are going to be willing to pay the added cost plug-in vehicles carry.”

Customer Preferences

Toyota’s California market share means it may need to sell more than 16,000 plug-in hybrids and all-electric models over the three-year period, based on a Bloomberg calculation. Carmakers can comply by selling some plug-ins in states such as New York and Massachusetts that follow California’s pollution rules.

A company failing to meet California rules can potentially be barred from selling any vehicles there.

Lithium-ion batteries needed for plug-ins with at least 10 miles (16 kilometers) of all-electric driving, may add $8,000 to a vehicle’s cost, said Menahem Anderman, president of Advanced Automotive Batteries, a consulting firm in Oregon House, California. How long they’ll last is unknown, said Anderman, whose research is used by carmakers including Toyota, Honda and GM.

Currently, the only electric car sold in the U.S. is Tesla Motors Inc.’s $109,000 Roadster.

GM, Nissan

Automakers’ plans for a range of cars powered solely by lithium-ion batteries and plug-in hybrids that run on battery power alone for short distances until a gasoline engine engages also coincide with California’s rules.

These include GM’s $40,000 plug-in Chevrolet Volt due late next year; Nissan Motor Co.’s plan to sell battery-only cars starting in 2010; and Toyota’s aim to offer both a plug-in Prius hybrid and a tiny all-electric car that’s due in 2012. Ford Motor Co. plans a battery-only Focus compact due in 2011.

Honda already sells small numbers of zero-emission hydrogen fuel-cell sedans in California to meet state rules. While President Takeo Fukui said in April that the company may also add plug-in hybrids, Tokyo-based Honda hasn’t announced details of such a plan.

Honda’s Hydrogen

Honda has favored electric vehicles powered by hydrogen over batteries because it believes they offer a better combination of low emissions and range, said Ben Knight, vice president of the company’s U.S. research unit.

“We see potential for battery vehicles for short intra- city use,” Knight said in an interview in Burbank, California, on May 27. “If it’s that broader level of mobility most of us really appreciate and utilize, the fuel cell has that broad functionality and capability.”

Knight declined to discuss the added expense for Honda to meet California’s advanced vehicle rules.

Toyota has said U.S. demand for plug-ins may be much smaller than advocates suggest. Bill Reinert, Toyota’s U.S. national manager for advanced technology, told a National Academy of Sciences panel in Washington May 18 that a market for such vehicles may be 50,000 units a year at most and as few as 3,500.

“If at the end of the day the market says ‘we don’t want these cars,’ we may have to take a look the requirements,” said Gromis. “We have confidence that they will be accepted.”

To contact the reporter on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

Last Updated: June 4, 2009 16:16 EDT