BT Explainer: Why the consensus on CAFE 3 norms is a big breakthrough

The revised draft on Corporate Average Fuel Efficiency (CAFE)-3 norms, which come into effect from April 2027, has finally got the green light from India’s passenger vehicle industry.

The consensus comes after months of negotiations between the auto industry and three key ministries of the government: power, road transport & highways and heavy industries.

An old version of the draft released by the Bureau of Energy Efficiency (BEE) in September 2025 had caused a bitter rift between India’s biggest carmaker, Maruti Suzuki, and homegrown automaker Tata Motors Passenger Vehicles over a weight-based relaxation for small cars.

The government first introduced CAFE norms in 2017 under the Energy Conservation Act of 2001 to reduce emissions and push automakers toward building more fuel-efficient cars, including strong hybrids and electric vehicles.

The CAFE regulations apply to an entire fleet of vehicles of a car manufacturer, which includes passenger vehicles powered by petrol, diesel, LPG, CNG, hybrid systems, and electricity, provided their gross vehicle weight is under 3,500 kilograms.

What the new CAFÉ-3 draft says

The new CAFÉ-3 draft does not give special concessions to small cars, unlike the previous one. Even though the target is still weight-based, heavier SUVs don’t get as much penalty as before. Small cars, on the other hand, lose part of their regulatory advantage. In the September 2025 draft, cars having an unladen mass of up to 909 kg, engine displacement of up to 1,200 cc and length of up to 4,000 mm got an extra 3 gram/km CO₂ deduction in emissions calculation.

Super credit for EVs and strong hybrids

Unlike the earlier draft, which offered 2 super credits to strong hybrid vehicles, the new draft brings this down to 1.6. Electric vehicles continue to get 3 super credits. This means a battery electric vehicle will be counted three times, thus reducing the average fleet emissions of an automaker. Similarly, plug-in hybrids will be counted 2.5 times and strong hybrid vehicles at 1.6 times. Flex-fuel vehicles, which may enter the Indian market over the coming years amid a renewed push for ethanol due to the West Asia war, will have a multiplier of 1.1.

Credit pooling

The revised CAFÉ-3 draft proposes a credit-debit pooling system for compliance. Credits and debits will be assessed on an annual basis for an individual manufacturer and recorded in the manufacturer’s passbook. A carmaker may exchange or trade credits with other manufacturers for the purpose of compliance on their mutually agreed terms and conditions. Manufacturers will also be permitted to offset any debit balance accumulated in their respective passbooks through the purchase of credits from the Bureau of Energy Efficiency. The price per gram CO2/km of such credits shall be as prescribed for each reporting period: FY 2028 – Rs 2,500; FY 2029 – Rs 3,000; FY 2030 – Rs 3,500; FY 2031 – Rs 4,000; and FY 2032 – Rs 4,500, respectively.

Penalty

All penalties payable by carmakers will be credited to the Central Energy Conservation Fund established under the Energy Conservation Act. Of the total amount so credited, 90% will be transferred to the respective state governments, and 10% will be retained by the central government. Each state’s portion will be allocated to its Consolidated Fund based on its share of the total sales of that vehicle by the manufacturer or importer during the compliance period.

Why it matters

Japanese carmakers, including Maruti Suzuki, Toyota Kirloskar Motor and Honda Cars India, had supported the earlier draft, while homegrown carmakers such as Tata Motors Passenger Vehicles and Mahindra & Mahindra (M&M) had opposed it. South Korean carmakers Hyundai Motor India and Kia had also opposed weight-based concessions to small cars. The consensus marks a turning point for carmakers as the country gets ready for stricter fleet emission norms from April next year.