CAFE III: Hastening slowly

The norms do not accelerate the needed transition

The recently notified third Corporate Average Fuel Economy (CAFE III) standard for passenger vehicles between April 2027 and March 2032 is a well-meaning attempt to steer the passenger-car industry towards lower emission norms. But questions arise on whether these norms have gone far enough to drive a meaningful transition. CAFE III mandates an improvement of roughly 16.7 per cent in fuel efficiency over five years. The fuel-consumption target is based on an equation linked to a reference weight and baseline fuel-consumption target across each manufacturer’s fleet. For CAFE III, the reference weight has increased from 1,082 kg to 1,229 kg. The higher reference weight seeks to address a demand for higher concessions for small cars, which became the subject of feverish lobbying by manufacturers. Crucially, the norms include a “super-credit” mechanism, which adds compliance values for cleaner vehicles. For instance, each battery electric vehicle (BEV) and range-extended EV will be counted as three vehicles for calculating fleet performance. Plug-in EVs and strong hybrid EVs using ethanol follow similar volume-derogation norms on a reducing scale. Manufacturers can also claim efficiency improvement for specified technologies such as start-stop systems and tyre-pressure monitoring, light-emission diode, or improved air conditioning systems.

 

Although the industry has broadly welcomed the new standards, it is unclear whether these norms are sufficient to address the issue for which these norms were first introduced in 2017 — to reduce fuel consumption and carbon emission. The overall passenger-car market is expected to grow from five million units in 2025 to 6.5 million units by 2032, suggesting that reducing carbon emission from this industry will remain a challenge. The obvious solution lies in accelerating the transition to EVs. Though the CAFÉ III mechanisms incentivise EV production, they do not go far enough. As former NITI Aayog chief executive officer Amitabh Kant has pointed out, the norms have not gone far enough in compelling the industry to make a major transition to EVs. In an X post, he said EVs became one option among many when they should be the destination. Certainly there is considerable scope for the government to have mandated a more aggressive EV transition. The norms set an 11 per cent target for EVs by 2032; but the industry is already at 8 per cent, implying that a higher target would not have been outside the bounds of manufacturers’ capabilities.

 

The flexible compliance mechanism, which introduced a credit-debit system, also raises doubts about the overall efficacy of the new standards. Manufacturers that exceed their efficiency targets will get credits and those that fall short will accumulate debits. The credits can be accumulated between two compliance blocks — FY28 to FY30 and the second FY31 to FY32 — and traded between manufacturers. Those manufacturers with debits can buy credits from the Bureau of Energy Efficiency (BEE) at an escalating price between 2027-28 and 2031-32. Two issues arise in the context. First, whether this system incentivises non-compliance, just as carbon credits have come to be considered a licence to pollute. Second, it is unusual for the regulator to sell such credits or, indeed, be a participant in such a market at all. Given its role in curbing vehicular pollution, CAFE III could have taken a higher road.