Weighty matters for cars: CAFE row overlooks public-policy objectives

The government’s draft norms for the third edition of Corporate Average Fuel Efficiency (CAFE-III), applicable between FY28 and FY32, have raised afresh the debate in the Indian automobile industry on incentivising small cars over big cars. The contours of the current controversy involve implications that go beyond the question of affordability to often conflicting questions of structural changes in automobile markets, urban pollution, public health as well as safety standards. 

 

CAFE norms, in force since FY18, have set out fleet-wide carbon-dioxide emission targets for all manufacturers of passenger vehicles. They entail cutting fuel consumption on each car. CAFE-III stiffens these targets and will involve higher investment for manufacturers in better-designed parts and components. Since electric vehicles (EVs) will count as “super credits”, the Bureau of Energy Efficiency, which has designed the standards, has offered an incentive for carmakers to transition to zero- or low-emission (eg hybrid) vehicles. The controversy has arisen over the disproportionate cost these norms impose on small cars vis-à-vis larger cars and sport utility vehicles (SUVs). The emission-norm reduction for both types of cars is the same in absolute terms, but in percentage terms, lighter cars (of 900 kg) must reduce emission by 27 per cent against 22 per cent for a 1,500-kg car. As a result, a relaxation has been proposed for small cars — which weigh less than 909 kg, with an engine of up to 1,200 cc, and a maximum length of 4,000 mm. No surprise, this exemption has split the industry, with makers of SUVs and larger cars unhappy at this discrimination.

 

From the point of view of optimal urban-traffic management and, indirectly, urban pollution and public-health objectives, this exemption could, however, be seen as unexceptionable. In the past few years, narrow tax differentials and growing consumer prosperity saw first-time car buyers opting for compact SUVs, which were priced close to small cars. This upscaling may indicate an evolving consumer base but SUVs are generally considered more inefficient in terms of space utilisation on the road. The growing crowds of SUVs, with their limited manoeuvrability and often occupied by just one or two people, on Indian roads, has been a key reason for the acute traffic congestion, which characterises almost every Indian city, large and small. The resulting emission from idling engines of cars stuck for long hours in traffic snarls has contributed significantly to the dangerously toxic urban air quality. The pre-Diwali cut in goods and services tax on small cars from 29-31 per cent to a flat 18 per cent saw a moderate surge in small-car sales after years, suggesting that consumers perceive a favourable price-value equation in hatchbacks and sedans. Upping their price on account of tighter fuel norms may drive consumers back to SUVs.

 

On the other hand, there are apprehensions that allowing weight-based emission exemption may encourage manufacturers to compromise on the additional safety components that add weight to a vehicle. Indeed, it is no coincidence that cars that meet Indian and global safety standards are mostly SUVs and their compact counterparts. This is, undoubtedly, a valid point for industry regulators to consider, given India’s poor road-safety record. Rather than offering a weight-based carve-out under CAFE-III, recalibrating the incentives to encourage manufacturers to focus on electric or hybrid hatchbacks and sedans may be a better alternative in achieving multiple public-policy outcomes.