Govt plans tighter fuel-economy norms, credit market from FY28, Pg21

Key Highlights:

• The Power Ministry has proposed new Corporate Average Fuel Economy (CAFE)-III norms for passenger vehicles in India.
• These stricter fuel-economy standards will be applicable to M1-category vehicles manufactured or imported for sale in India from April 1, 2027, to March 31, 2032.
• The norms aim to progressively reduce fleet-average fuel consumption from 3.996 litres per 100 km (94.76 gCO₂ per km) in 2027-28 to 3.3273 litres per 100 km (78.90 gCO₂ per km) by 2031-32.
• The draft introduces Carbon Neutrality Factors for alternative fuels like ethanol, biofuel, and compressed biogas.
• It also includes super credits for electric, hybrid, and flex-fuel vehicles, along with a credit-and-debit compliance mechanism.
• The existing CAFE-II norms are scheduled to expire on March 31, 2027.

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Detailed Insights:

• CAFE norms are regulatory standards enforced by the Bureau of Energy Efficiency (BEE) under the Ministry of Power to mandate fleet-average fuel consumption and CO2 emission targets for passenger cars.
• The primary objectives of these norms are to enhance energy security, reduce oil imports, and mitigate the environmental impact of road transport.
• M1-category vehicles encompass passenger vehicles with not more than eight seats in addition to the driver's seat, covering standard hatchbacks, sedans, and SUVs.
• Compliance with the CAFE-III norms will be assessed over two blocks: an initial three-year period followed by a two-year period.
• Carbon Neutrality Factors will allow a specified reduction in declared tailpipe CO2 emissions for vehicles utilizing approved alternative fuels, with an 8% reduction proposed for current ethanol blending levels.
• Super credits incentivize manufacturers to expand their cleaner vehicle portfolios by assigning a multiplier to electric, plug-in hybrid, strong hybrid, and flex-fuel vehicles in fleet-average calculations.
• A credit-and-debit system will enable manufacturers exceeding their targets to earn tradable compliance credits, while those falling short can purchase credits from the BEE or other manufacturers.
• The initial buyout price for compliance credits from the BEE is proposed at ₹2,500 per gCO₂/km, increasing annually.
• Manufacturers with annual sales below 1,000 vehicles will be exempt from these norms.
• The draft norms are currently open for stakeholder consultation, with feedback invited until August 6, 2026.

Key Concepts Involved:

• Corporate Average Fuel Economy (CAFE) Norms: Regulatory framework mandating automakers to achieve specific fleet-average fuel consumption and CO2 emission targets across their passenger vehicle sales.
• M1-category vehicles: A classification for motor vehicles designed for passenger transport, having a maximum of eight seats in addition to the driver's seat.
• Carbon Neutrality Factors: A mechanism that allows for a reduction in declared tailpipe CO2 emissions for vehicles using specified carbon-neutral or low-carbon fuels.
• Super Credits: An incentive system within CAFE norms that grants additional compliance credit for selling electric, hybrid, and flex-fuel vehicles, easing overall fleet-average targets.
• Credit-and-Debit System: A market-based compliance mechanism allowing manufacturers to earn, trade, or purchase credits to meet fuel efficiency targets.