Small car makers have been protesting that fuel efficiency standards are unfair to them | Photo Credit: Emin Kelekci

The recently released draft on Corporate Average Fuel Efficiency (CAFE) norms for vehicles below 3,500 kg (read cars) has again generated smoke and din, akin to the version released about six months back. At that time, small car makers protested, and not without basis, that the fuel efficiency standards were unfair to them, vis-a-vis the large car makers.

Broadly speaking, the formula for permissible fuel consumption for an OEM’s vehicles (for every 100 km) allowed for a significantly higher level of fuel use for an increase in the average weight of vehicles produced annually. This formula has been altered in the April version of the proposed CAFE 3 norms (to come into effect from April 2027 for five years). It reduces the permissible level of increase in fuel consumption corresponding to average weight. This fuel standard, which doubles up as an emissions standard, is better for small car makers. It probably also means SUV makers will have to produce more EVs as carbon offsets to meet the new targets. This is all very well, provided the manner in which EV emissions are calculated, which includes emissions from the power generation stage, is accurate. An underestimation of EV emissions (and thereby an overestimation of their green attributes) would imply that fewer EVs would have to be produced as a set-off against ICE vehicles. Researchers have pointed out that this is happening in India.

Add to this, the policy of super credits, where one EV produced will be counted as three for set-off, and it appears that the production of EVs is actually being discouraged (as fewer EVs will have to be produced for compliance). The draft should attend to this issue. Lower super credits for hybrids are a good step forward. The larger question is whether industry level fuel consumption/emission standards are good enough, given air quality imperatives. The CAFE 3 emission target, as per the earlier draft, has been pegged at 91.7g of carbon dioxide per km and fuel consumption at 3.01 litres/100 km. Some sector experts have suggested that the emissions target can be brought down to below 70, accompanied by a better computation of EV emissions. This should spur the shift to EVs.

Meanwhile, it is to be noted that technology is rapidly transforming the EV landscape. Battery costs have dropped and their performance has improved. The cost of owning an EV, quite aside from using one, is converging with an ICE vehicle; it has already done so in China. EV makers, which enjoy subsidies and lower taxes, must deliver now. Auto policy must nudge OEMs towards making small ICE vehicles and more so EVs. Taxes too can be used to prod a shift away from big vehicles. The April draft does well to propose carbon credits as an instrument of enforcement, vis-a-vis penalties for not meeting standards. Dues on account of the latter have accumulated. However, price discovery in carbon must be robust. Finally, the market mechanism with policy nudges works better than heavy handed regulation.

Published on April 16, 2026