Incremental change: On Corporate Average Fuel Efficiency-III

In mid-April, news broke that India’s automakers had unanimously agreed to a new fuel efficiency and emissions reduction target proposed by the Bureau of Energy Efficiency (BEE), the sector’s standards-setting body. This follows a controversy late last year, driven largely by differences between Maruti Suzuki — which commands an overwhelming share of the small-car segment — and other manufacturers. The earlier proposal had effectively created a carve-out for small cars, a segment that accounts for about 14%-15% of passenger vehicle sales, delaying the shift to cleaner fuels and technologies. Larger carmakers, meanwhile, were required to meet more stringent targets, putting them at a relative disadvantage in terms of pricing and investment. While this triggered a relook at the proposed emissions norms, what has emerged is only marginally better. In fact, some provisions appear counterproductive to reducing emissions and decarbonising the transport sector — India’s third-largest source of greenhouse gas emissions. At first glance, the headline reduction in Corporate Average Fuel Efficiency (CAFE) targets — from about 113 grams of CO2 per kilometre under CAFE-II to 77 g/km by 2031-32 under CAFE-III — appears ambitious. The new cycle is proposed to run from April 2027 to March 2032. However, the framework’s flexible design may weaken compliance and slow the urgent transition to cleaner technologies, especially electrification.

To be sure, the explicit carve-out for small cars has been removed, but it has been replaced by several alternative compliance pathways. These include credits for higher ethanol blending (from E20 to E85-compatible vehicles) and for incremental efficiency technologies such as start-stop systems, regenerative braking, and tyre pressure monitoring systems. While useful, these are marginal improvements that allow manufacturers to meet targets without a structural shift to electric mobility. The BEE has also proposed super-credits, where certain technologies count multiple times towards compliance — for instance, a battery electric vehicle could count as three vehicles. Combined with credit banking and trading, this creates a system in which manufacturers with an early technological lead can accumulate surplus credits and sell them to laggards. Further, compliance is to be assessed over three-year blocks rather than annually, allowing manufacturers to average performance over time. This reduces immediate pressure and weakens the signalling effect that regulations are meant to provide. At a time of fossil fuel volatility, this policy appears too weak to drive meaningful change in a sector that is central to climate mitigation, India’s energy security, and macroeconomic stability. Without sharper incentives, CAFE-III risks becoming a framework that manages emissions on paper rather than transforming them in practice.