Small cars get big emissions relief under the new CAFE-3 draft proposal

Makers of small cars won relief of sorts on Thursday, with the draft rules on fleet-wide emissions carving out a niche for them with a lighter burden.

Cars shorter than four meters, weighing less than 909 kg and powered by sub-1200 cc engines will get an advantage of 3 grams while calculating carbon dioxide (CO2) emissions for so-called Corporate Average Fuel Efficiency (CAFE 3) rules, the Bureau of Energy Efficiency (BEE) said. This marks a victory for Maruti Suzuki India Ltd, which had lobbied for its small cars such as the Alto and the Wagon-R. Though the draft rules do not provide the emissions exemption that Maruti Suzuki had demanded, it still provides an edge for makers of small automobiles.

The benefit is limited to a maximum of 9g per kilometer over the five-year period of the new norms.

CAFE norms require carmakers to improve fuel efficiency across their fleets, not just individual models. By setting limits on a company's sales-weighted average CO₂ emissions, the norms push manufacturers to produce and sell more fuel-efficient cars, including electric and hybrid vehicles, to balance out the emissions from larger, less-efficient models.

Maruti Suzuki had lobbied for its bread-and-butter small cars, in a market increasingly dominated by SUVs and premium sedans from its rivals like Mahindra & Mahindra Ltd and Hyundai Motor India Ltd. Mint has previously reported that the BEE was conducting a study to assess whether smaller vehicles, which are more fuel efficient due to their size, need relief under the regulation.

Relief on the emissions front means makers of small cars—which pollute less on an absolute basis—will be spared the hefty expenses of meeting tougher emission standards, which would have meant higher prices and loss of competitiveness. The BEE announcement also follows the recent cut in the goods and services tax (GST) on cars under 4 m to 18% from the earlier 28% plus cess.

This also comes at a time when small car sales have plunged: Data from industry lobby Society of Indian Automobile Manufacturers (Siam) showed that sales of small cars—under 3.6 metres in length—fell from 460,772 units in FY19 to 152,262 in FY24 and 133,397 in FY25, a 71% drop over six years, Mint reported on 5 June.

Transport sector experts said the CAFE 3 relief, along with the impact of the GST reform, may push automakers towards small car models. Additionally, electric vehicle models may also see a hike in supply.

“Carmakers will look to benefit from the easing of norms for small cars by launching more products. Coupled with tax benefits, small cars may see more supply. But as the market demand for cars itself has moved towards bigger and heavier vehicles, the norm will lead to manufacturers launching and increasing production of electric vehicles to meet the emission regulation,” said Sharif Qamar, associate director of transport and urban governance at the Energy and Resources Institute (Teri).

An industry executive who was involved in discussions between Siam and BEE said the development will be a major relief for small carmakers, especially Maruti Suzuki.

"What needs to be seen is how strict the norms are. Basis the earlier calculation, the cap was at 91.7 g CO2 per km. If the cap is lowered, then the effect of benefits for small cars will be diluted. But basis any calculation, small cars will get some benefits," the executive said on the condition of anonymity.

Fuel emission in terms of grams of CO2 emitted for every kilometre is calculated for an automaker’s entire fleet. That means emissions of every vehicle sold will be tallied for 1km, and then divided by the number of vehicles sold. This will result in an automaker’s fleet’s emissions in terms of grams of carbon dioxide emitted for every kilometre travelled. A lower figure is more desirable, as higher figures may result in automakers violating CAFE norms. Violations will result in a penalty of at least ₹10 lakh for every vehicle found emitting excess carbon dioxide. Automakers will have to pay extra penalties for the amount of CO2 emitted beyond the CAFE ceiling, and breaching it by a higher margin will attract heftier penalties.

BEE, Siam and Maruti Suzuki did not respond to Mint’s queries on the development.

To be sure, BEE’s latest proposal is considerably different from its earlier proposal in June 2024. Then, the efficiency regulator had set a cap of 91.7 g of CO2 per km on carbon dioxide emissions made by the entire fleet of an automaker. The latest draft does not mention a cap, but directs automakers to assess CO2 emissions via testing agencies.

As per the proposal, carmakers will have to gradually reduce their fuel consumption per 100 km every year starting with 3.726 litres in 2027 to 3.013 litres in 2032. Industry executives and domain experts told Mint that this will make the latest BEE proposal stricter than its earlier June 2024 suggestion, based on preliminary assessments.

BEE has sought stakeholder comments on the draft in the next 21 days.

Mint earlier reported that Siam was working on an addendum on its earlier recommendation, which would include the industry's plea for relief to small cars. The BEE proposal also has some relief for flex fuel vehicles which have high ethanol blending above 85%.

CAFE norms also have a supercredit system, where cleaner powertrain vehicles are counted as multiples, as an incentive for automakers to make more cleaner vehicles. In the CAFE 3 proposal on Thursday, BEE proposed that each EV sold will be counted as three units, each strong hybrid flex fuel ethanol car and plug-in hybrid car sold will be counted as 2.5 units, strong hybrids as 2, and flex fuel ethanol cars as 1.5 units.

Earlier in June 2024, BEE had suggested different supercredits–hydrogen fuel cell cars as 5, electric cars as 4, plug-in hybrids as 2, strong hybrids as 1.2, and flex fuel ethanol cars as 0.95 units.