Following lengthy discussions and intense debates between automakers over the past 27 months, the Ministry of Energy has announced the introduction of Corporate Average Fuel Economy (CAFE-3) standards to reduce carbon dioxide emissions.
The final notification stipulated that small vehicles will not receive a separate exemption. Maruti Suzuki India (MSIL), India's largest automaker and dominant seller of small cars in the country, actively advocated for such a concession.
The draft from September 2025 proposed a special emission reduction of 3 grams per kilometer (g/km) for gasoline vehicles weighing up to 909 kg. Under this proposal, 3 g/km was subtracted from the manufacturer's CAFE calculation.
However, several other automakers, including major electric vehicle (EV) manufacturers Tata Motors and JSW MG Motor, strongly objected to this exception, arguing that it disproportionately benefited a segment dominated by one manufacturer. This dispute escalated and ultimately reached the Prime Minister's Office (PMO).
The CAFE-3 standards will come into effect in April 2027 and remain valid until March 2032.
Resolution of the Small Car Dispute
The government resolved the conflict not by granting any exceptions, but by altering the fundamental CAFE formula used to calculate the target carbon dioxide emission rate for each automaker.
This is significant because CAFE targets are not fixed for every car; they are calculated for the entire fleet of each manufacturer based on the weighted average mass of the vehicles sold by them. The heavier the fleet, the higher the permissible fuel consumption target.
The September 2025 draft used 1170 kg as the reference weight and had a relatively steep weight adjustment. It also separately granted a 3 g/km exemption to qualified gasoline vehicles weighing less than 909 kg. The final notification cancels this separate exemption and changes the reference weight to 1229 kg. It also uses a shallower weight adjustment, with the annual multiplier decreasing from 0.00158 in FY28 to 0.00131 in FY32.
Simply put, this changes the benefit for the entire industry. Lighter fleets receive a softer target than under the September 2025 formula, while heavier fleets receive a stricter target.
For example, using the final notification formula, a 909 kg vehicle receives an emission target of about 82.8 g/km in FY28, compared to approximately 76 g/km under the September 2025 formula. Conversely, a 2500 kg vehicle receives a target of about 142.4 g/km in FY28 under the final formula, compared to approximately 151.4 g/km under the September 2025 formula. This means the final formula is significantly stricter for very heavy vehicles.
Thus, instead of creating a special category for vehicles weighing below 909 kg, the government effectively introduced more relief for lighter vehicles into the overall formula.
The first CAFE-3 draft was released by the Bureau of Energy Efficiency (BEE), which falls under the Ministry of Energy, in June 2024. Maruti subsequently requested a separate concession for small cars. The September 2025 draft officially introduced the 3 g/km provision, after which the industry sharply divided. BEE released another revised draft in July of this year, which canceled the small car exemption.
Electric Vehicles Retain Advantage
Another important feature of CAFE-3 is the supercredit mechanism, which grants manufacturers additional compliance value for selling cleaner vehicles. According to the final rules, one battery electric vehicle (BEV) counts as three vehicles when calculating the manufacturer's fleet metrics. The same 3x factor applies to range extended electric vehicles (REEV). The higher the factor, the easier it is for the automaker to meet its emission target.
For plug-in hybrids and strong flexible fuel hybrids, the factor is 2.5x. Strong hybrids receive a factor of 1.6x, and flexible fuel vehicles receive 1.1x. Any fuel mixture containing at least 85 percent ethanol is called flexible fuel.
The final structure differs significantly from the initial proposal. The June 2024 draft proposed a 4x factor for BEV, 2x for PHEV, 1.2x for strong hybrids, and a 5x factor for hydrogen fuel cells. Hydrogen fuel cells are not featured in the final supercredit table.
Credits Introduced
The final notification also introduced a system of credits and debits, giving manufacturers greater flexibility in achieving targets. If the actual performance of a manufacturer's fleet is better than the set target, they earn credits. If they perform worse, debits accumulate. These entries are maintained in a manufacturer-level ledger.
The system does not require every manufacturer to precisely meet its target every year without any flexibility. Credits can be transferred within a compliance block. The first block covers three years, FY28-FY30, and the second covers two years, FY31-FY32. Manufacturers can also trade credits with other manufacturers.
A manufacturer still having a deficit can purchase credits from BEE. The purchase price starts at 2500 rupees per gram of carbon dioxide per kilometer in FY28 and increases by 500 rupees each year up to 4500 rupees in FY32. The trading period will run from October 1st to October 31st each year.