The move revokes an Obama-era waiver that allowed the state to set its own standards for greenhouse gas emissions for cars.
President Trump says the move will cut car prices and the impact on emissions will be minimal.
But it is likely to spark a legal battle related to states' rights.
"The Trump administration is revoking California's Federal Waiver on emissions in order to produce far less expensive cars for the consumer," Donald Trump tweeted on Wednesday.
"Automakers should seize this opportunity because without this alternative to California, you will be out of business."
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