The revised draft of the Corporate Average Fuel Efficiency (CAFE 3) rules, shared by the government with automakers, has recast the compliance framework for passenger vehicles by expanding the use of credits and widening technology pathways. This is expected to significantly reduce the likelihood of penalties while addressing fault lines that had split the auto industry under the earlier proposal.
At the core of the draft is a more flexible credit regime. Carmakers that outperform their fleet-average fuel consumption targets will accumulate credits, while those falling short can offset deficits by carrying forward past surpluses, trading with other manufacturers, or purchasing credits from the Bureau of Energy Efficiency at pre-declared prices rising from Rs 2,500 to Rs 4,500 per unit over the period. The system will operate through a passbook that will track annual balances, with settlement allowed within defined compliance blocks.
This layered mechanism will effectively convert compliance into a market-based exercise, allowing companies to manage gaps without immediate penalties. Only residual shortfalls after credit adjustments would attract action under the energy conservation law, shifting the regime from strict enforcement to calibrated compliance.
From Penalties to Passbooks
The draft has also broadened the set of technologies that can be used to meet targets, addressing a key concern among manufacturers. Electric vehicles continue to receive the highest weightage, counting as three times their sales volume for compliance purposes. However, hybrids now gain material recognition, with plug-in hybrids receiving a 2.5 multiplier and strong hybrids 1.6, altering the earlier perception of an EV-skewed framework.
In parallel, the introduction of a carbon neutrality factor provides explicit benefits for vehicles using ethanol blends and CNG, allowing manufacturers to discount a portion of their CO₂ emissions. Flex-fuel and hybrid ethanol vehicles receive the highest adjustment, while petrol vehicles using E20–E30 blends also gain a defined benefit.
The draft has further allowed incremental gains through certified efficiency technologies such as start-stop systems, regenerative braking and improved thermal management, enabling companies to optimise existing internal combustion portfolios rather than rely solely on electrification.
Diversifying the Toolkit
Targets themselves continue to tighten annually through FY32 and remain linked to the average weight of vehicles sold by a manufacturer, preserving differentiation across segments. But the expanded compliance toolkit, combined with credit trading and banking, lowers the risk of abrupt cost shocks for firms with heavier or less efficient fleets.
Taken together, the changes mark a shift from a narrower, EV-led approach to a broader transition framework. By accommodating electric, hybrid and biofuel pathways alongside financial flexibility, the draft has tried to reconcile the competing positions of EV-focused manufacturers and those invested in hybrids or conventional powertrains, thus signalling a more balanced route to improving fleet efficiency.
