What are CAFE norms and why are small carmakers worried about them?

While India's CAFE formula resembles the European Union, it lacks any adjustments for protecting small cars

The central government has been planning to update the Corporate Average Fuel Efficiency (CAFE) norms, which are aimed at regulating the average carbon dioxide (CO₂) output of an automaker’s entire fleet. However, the move has sparked concerns among small car manufacturers, many of whom claim that the current formula unfairly stacks the odds against them.

What’s the latest

In September, draft CAFE-III, -IV norms were released, which set much stricter limits on how much carbon dioxide emissions cars will be allowed. According to the draft guidelines, under CAFE-III, which is planned for 2027 to 2032, carmakers must bring their fleet-average emissions down to 91.7 g/km. From 2032 to 2037, the rules get even tougher under CAFE-IV, with an even lower limit of 70 g/km, making it the strictest target India has ever proposed.

 

What are CAFE norms and why do they matter?

CAFE norms are rules that tell carmakers how much CO₂ their cars can produce on average, which directly affects the kinds of cars they can build. For example, if a model makes the company’s overall emissions too high, it may have to be redesigned, made more efficient, or even discontinued. 

 

The latest move assumes significance given that small cars are an important part of the Indian economy, as they are affordable, fuel-efficient, and make personal mobility accessible to millions.

Who sets CAFE norms

The CAFE norms are designed by the Bureau of Energy Efficiency (BEE) and officially issued through the Ministry of Power. The government checks compliance together with the Ministry of Road Transport and Highways (MoRTH).

 

How CAFE is calculated

Emissions are measured in grams of CO₂ produced per kilometre. Instead of checking one car alone, the government looks at the average of all the cars a company sells in a year. First, it calculates the company’s average car weight based on how many units of each model are sold. Then a CO₂ target is set for that weight.

 

Each model’s CO₂ emissions are measured in certified labs, and a sales-weighted average is calculated. If the company’s actual average is below its target, it passes. Selling EVs and hybrids helps because they count as more than one car, lowering the overall average.

India’s CAFE formula explained

India's weight-based formula means the heavier the car, the more pollution it is allowed to produce. Lighter cars get a much stricter limit, even though they naturally emit less.

 

This creates an imbalance. For example, Car A (830 kg) gets a very tight CO₂ target, while Car B (1,350 kg) gets a much more relaxed target. Hence, small cars are more likely to fail the rules, while big cars find it easier to pass, even though big cars usually pollute more.

How India differs from global peers

While India’s formula resembles the European Union, it lacks any adjustments for protecting small cars. A Nomura study released in July this year noted that major global markets, including the US, EU, China, Japan, and South Korea, protect small cars in their CAFE rules, while India’s linear framework penalises lighter, low-emission cars, creating a “structural bias” benefiting heavier vehicles.

Why small carmakers are worried

• The linear CAFE formula is tougher on lighter cars, even if they naturally emit less carbon dioxide.
• Small car sales have been steadily shrinking in recent years.
• Carmakers may stop selling small models and instead shift to bigger models.
• Meeting stricter targets requires new technology, like dual injectors, better combustion systems, or mild hybrid tech, which increases costs.

What is the proposed relief?

To address the issue of the small carmakers, the draft rules proposed a 3g/km deduction for petrol cars under 909 kg, 1,200cc, and <4m. However, this led to a split in opinion among the automakers.

 

Business Standard reported that at a CEOs Council meeting of the Society of Indian Automobile Manufacturers (Siam) on November 7, 15 out of 19 automakers voted against the proposed weight-based exemption for small cars. While Maruti Suzuki India (MSIL) and Renault voted yes, fifteen other companies, including BMW, Honda Cars, Hyundai, Isuzu, and Jaguar Land Rover, were against the rule.

 

The rule is crucial for MSIL, given that it has built its name by selling small, fuel-sipping hatchbacks such as Alto, WagonR, and Swift, whereas most of the others do not operate in this segment. Those who opposed argued that the exemption would create an unfair market advantage for small car-focused manufacturers and disrupt their existing business plans focused on larger, more profitable vehicles.

How penalties work

India follows a tiered penalty system for CAFE violations, and the fines can be very heavy. For example, Hyundai faced a penalty equal to almost 60 per cent of its FY23 profits.

 

After the Energy Conservation Act was amended in December 2022, the rules became stricter, mandating companies to pay ₹25,000 per vehicle if their fuel-efficiency shortfall is below 0.2 litres per 100 km, and ₹50,000 per vehicle if they exceed that shortfall, along with a base penalty of ₹10 lakh.

What it means

The updates could lead to many small, entry-level cars being phased out. They could push manufacturers towards selling more heavy SUVs, and affect both affordability and overall emissions. This shift may make cars more expensive for first-time buyers.

 

The BEE is currently reviewing inputs from Siam, and the final norms are expected before April 2027.