Key Updates in the Draft CAFE-III Norms for Passenger Vehicles

New Delhi, India Jul 17, 2026 ALN: The story so far: The Centre on Thursday (July 17, 2026) released the third draft of the Corporate Average Fuel Efficiency (CAFE)-III norms for passenger vehicles, proposing to recognize ethanol, compressed biogas (CBG), and other biofuels in compliance calculations by allowing manufacturers specified reductions in declared tailpipe carbon dioxide emissions. This release comes at a time when the automotive industry is under increasing pressure to reduce emissions and improve fuel efficiency, aligning with global sustainability goals.

What does the latest draft CAFE-3 propose?

The draft, open for stakeholder comments until August 6, comes after a year-long tussle between manufacturers of small and large cars over the compliance formula. This period of negotiation has highlighted the complexities and competing interests within the automotive sector, as manufacturers navigate the transition towards more sustainable practices while also considering their financial viability.

The draft broadly retains the changes introduced in the second draft, including a flatter weight-adjustment curve than the original September 2025 proposal, reducing the compliance advantage for heavier SUVs while easing targets for lighter vehicles. This adjustment reflects a growing recognition of the environmental impact of larger vehicles, which have traditionally been subject to less stringent regulations. Overall fleet-wide emission targets have also been relaxed by around 21% compared with the original proposal, indicating a shift towards a more flexible approach to compliance.

Manufacturers will be required to progressively improve the fuel efficiency of their fleets, with the target tightening from 3.996 litres per 100 km (94.76 gCO₂/km) in 2027-28 to 3.327 litres per 100 km (78.90 gCO₂/km) by 2031-32. Compliance will be assessed over two blocks—an initial three-year period followed by a two-year period—instead of annually. This change aims to provide manufacturers with a more manageable timeline for achieving compliance, allowing for longer-term planning and investment in fuel-efficient technologies.

What is 100% ethanol blending?

The draft introduces Carbon Neutrality Factors (CNFs), allowing specified reductions in declared CO₂ emissions for vehicles running on ethanol, flex-fuel ethanol, CBG, and other biofuels before compliance is assessed. This move is part of a broader strategy to promote the use of alternative fuels, which are seen as crucial for reducing the carbon footprint of the transportation sector. It also proposes compliance incentives for approved fuel-saving technologies and continues to offer super credits for electric, plug-in hybrid, strong hybrid, and flex-fuel vehicles. These incentives are designed to encourage manufacturers to invest in cleaner technologies and to diversify their product offerings.

Manufacturers exceeding their targets will earn tradable compliance credits, while those falling short can purchase credits from other manufacturers or the Bureau of Energy Efficiency (BEE) to meet their obligations. This credit trading mechanism is intended to create a flexible compliance environment, allowing companies to strategize their emissions reductions in a way that aligns with their operational capabilities.

Keep increasing road-infra spending, frame policies to promote electrification

The five-year CAFE III norms will be valid till 2031-32, marking a significant commitment by the government to regulate emissions in the automotive sector. The implications of these norms extend beyond compliance; they signal a shift towards a more sustainable transportation ecosystem, which could influence consumer behavior and drive innovation within the industry.

What has changed?

The latest draft leaves most of the April proposal unchanged, suggesting the government has broadly stuck to the compromise it arrived at after months of intense negotiations between manufacturers of small cars and larger SUVs. The April version had largely defused the industry’s biggest point of contention by replacing the earlier, steeper weight-adjustment curve with a flatter one and softening the compliance regime. This compromise reflects the government's recognition of the need for a balanced approach that considers the diverse range of vehicles on the market.

The weight-adjustment curve was flattened, changing the way emission targets vary with vehicle weight. Instead of a uniform slope of 0.002 proposed for all five years, the latest draft proposes a slope of 0.00158 in the first year, gradually reducing to 0.00131 in the fifth year. This gradual adjustment is designed to ease the compliance burden on manufacturers while still encouraging improvements in fuel efficiency.

The draft also removes a distinct relaxation of 3 grams while calculating CO2 emissions for small cars weighing less than 909 kg, and powered by sub-1200 cc that sharpened the divide among automakers has also been removed. This removal indicates a move towards a more equitable compliance framework, where all manufacturers are held to similar standards regardless of the size of their vehicles.

It also introduced mechanisms such as carbon credit trading and pooling, allowing manufacturers that outperform their emission targets to sell credits to those that fall short. The shift marked a move away from the polarizing “small car versus big car” debate towards improving the overall emissions performance of a manufacturer’s fleet. This change is significant in fostering collaboration among manufacturers and promoting a collective effort towards achieving national emissions reduction goals.

Why were there differences between various automakers?

One of the most contentious issues in the CAFE-III discussions was the 3 g CO₂/km benefit for smaller cars for meeting emission targets. Tata Motors was among the strongest opponents, arguing there was “absolutely no justification” for offering concessions to small cars, particularly when manufacturers of larger vehicles were investing heavily in electrification to meet future norms. This highlights the tension between different segments of the automotive industry, as smaller manufacturers often feel disadvantaged by regulations that favor larger, more profitable vehicles.

Assuaging concerns: On India and ethanol-blended fuel

Maruti Suzuki, however, rejected the criticism. “Incorrect facts and narratives are being pushed in a very irresponsible manner by the makers of some large gas guzzlers to divert attention from their own large gas-guzzlers,” Rahul Bharti, Senior Executive Officer (Corporate Affairs), had said. He argued that weight- or size-based differentiation in fuel-efficiency regulations is common globally, citing Europe, the United States, China, Japan, and South Korea as examples where smaller vehicles receive relatively less stringent targets. This defense underscores the complexity of global automotive regulations and the varying standards that manufacturers must navigate.

Another contentious issue was the weight-based compliance formula in the earlier draft, which several manufacturers argued gave undue concessions to heavier vehicles. Under the CAFE framework, a manufacturer’s emission target is determined by the average weight of its fleet. Industry players contended that the proposed slope of the formula became increasingly lenient as vehicle weight rose, giving larger vehicles a disproportionate compliance advantage. This concern reflects a broader industry debate about the fairness of regulatory frameworks and the need for a level playing field among manufacturers of all sizes.

The release of the CAFE-III draft represents a critical juncture in India’s automotive regulatory landscape, as it seeks to balance environmental goals with economic realities. As the automotive industry continues to evolve, these norms will play a pivotal role in shaping the future of vehicle emissions, fuel efficiency, and the transition towards a more sustainable transportation ecosystem.