Since it's about commerce, can California allow the purchase and sale of the less stringent vehicles but only allow vehicles/engines to operate on its roads that meet the higher standards?
If you were to instead ask "can you sell a vehicle that can't be registered" the answer is "yes." You can also make your own car and in so doing ignore most safety and emissions requirements.
There is a notable lack of small car manufacturers and a lack of case law on some of this. Some do mostly cosmetic work on existing models, and some sell "kits" and may help you assemble it "yourself" so as to qualify for a shopbuilt title.