CAFE-3 draft eases emission norms, nudges automakers toward EV and hybrid shift

New Delhi: The Bureau of Energy Efficiency has relaxed emission targets across vehicle categories in its updated draft third-phase Corporate Average Fuel Efficiency (CAFE-3) regulations planned for 2027-32, following consultations with the Prime Minister’s Office.

However, in the draft regulations, dated April 8, the government resisted industry demands for a flat target, maintaining a path of gradual tightening, said people familiar with the matter. The regulations, set to kick in from April 1 next year, will require automobile manufacturers to improve fleet efficiency annually while offering some relaxations in emission targets to small cars.

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In a notable shift, in the latest draft circulated by the government among industry stakeholders, the slope determining permissible emissions has been eased, to 0.00158 for 2027-28 and 0.00131 for 2031-32 – pushing manufacturers to sell vehicles with relatively lesser fuel consumption. The slope stood at 0.002 for 2027-28 in the September 2025 draft.

A higher slope pivots the mathematical advantage toward heavier vehicles, and the flattening indicates a breather for makers of smaller or lighter cars. In the latest draft, the Bureau of Energy Efficiency has eased the slope to give 11-13 g per km benefit to small cars while tightening the target by 10-12 g per km for bigger cars.

A February 2026 revision placed before the Prime Minister’s Office had suggested an emission slope of 0.00153 for 2027-28 and 0.00128 for 2031-32, tilting the proposed regulations squarely in favour of small car makers, but the latest iteration seems to have balanced interests, said an industry expert.

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Sector watchers say the new draft will prompt intensified adoption of hybrid and electric vehicles (EVs) if manufacturers want to avoid paying penalties. As per the draft proposal, car makers selling higher-emission vehicles will face financial penalties.

Compliance Blocks

However, those producing EVs and hybrids can offset these penalties through credits earned from selling eco-friendly cars or by purchasing them from other manufacturers reporting robust credits.

“It will be nearly impossible for manufacturers to comply using only internal combustion engines. Automakers must pivot to battery electric vehicles and strong hybrids,” an industry representative told ET on condition of anonymity, adding that the volume derogation factors (super credits) for the new technology cars would help lower their fleet average, improving compliance.

The jury is still out on which car maker finally stands to gain from the latest draft regulations. An industry analysis of the draft trajectory indicates that the government is willing to allow heavier vehicles on the road if it results in improved fuel efficiency.

The latest draft retains a significant gap in super credits between electric and strong hybrid vehicles, signalling continued policy preference for electric cars.

As per the updated proposal, automobile manufacturers will also operate under a three-plus-two year block period, permitting carry-forward of annual surpluses or deficits within the block. Credits and debits can be carried forward within the compliance block of three years (from 2027-28 till 2029-30) and two years (2030-31 and 2031-32). Any unsettled credits at the end of a block period will lapse.

“The industry had requested the Centre to consider a block for calculation of compliance under CAFE norms in the event that if there is any disruption in supply chains due to any unforeseen events like we have witnessed with the pandemic and geopolitical unrest last few years, automakers can make provisions to meet them in the coming years. This has been accepted and incorporated,” said an industry executive.

Penalties for non-compliance with CAFE-3 rules, accordingly, will be assessed at the end of each block period and not annually. The amounts from penalties will flow into the Central Energy Conservation Fund, of which 90% will be redistributed to states proportional to vehicle sales and 10% will be retained by the Centre.