CAFE-III Rules: What Changes for EVs, Hybrids and Small Cars

India has notified the third phase of its Corporate Average Fuel Efficiency norms, CAFE-III, which will kick in from April 2027. The rules set tougher targets for the average fuel consumption of a carmaker's fleet. They also change how electric vehicles and hybrids are counted. The aim is to cut oil imports and tailpipe emissions.

What CAFE-III does

CAFE norms work on a fleet-average basis. Every manufacturer sells a mix of models. The average fuel efficiency of that mix must meet a target. If it doesn't, the company pays a penalty. CAFE-I started in 2017. CAFE-II followed in 2022. CAFE-III raises the bar further.

Under CAFE-III, the target for passenger vehicles is set at 91.7 grams of CO2 per kilometre by 2027-28. That's down from about 113 g/km under CAFE-II. The shift is steep. It forces carmakers to sell more efficient petrol cars, more hybrids, or more EVs.

How EVs are treated

Battery electric vehicles get a big weight in the new rules. Each EV sold earns credits that can be used to offset high-emitting models. But the credit multiplier drops over time. In the early years, one EV may count as more than one unit. Later, that advantage shrinks. The idea is to push carmakers to sell EVs without letting them rely on credits forever.

There's a catch. EVs themselves have no tailpipe emissions, so they are not directly measured under CAFE. But their electricity source matters for overall emissions. The rules don't count grid emissions. That's a gap critics point out.

Hybrids: the middle path

Strong hybrids, which run on both petrol and electric power, get some credit too. They are treated as more efficient than pure petrol cars. But the credit is less than for full EVs. This has upset some carmakers who bet big on hybrids. They argue that hybrids are a practical way to cut fuel use in a country where charging infrastructure is still thin.

The government's stance is clear: the final goal is zero tailpipe emissions. Hybrids are a bridge, not the destination.

Small cars under pressure

Small cars, which form the bulk of Indian sales, face a tough road. Many entry-level models have modest fuel efficiency. To meet fleet targets, makers may have to push up prices or phase out some variants. That could hurt budget buyers. Already, small car sales have been sliding as buyers move to SUVs. CAFE-III may speed up that shift.

Some analysts say the norms could make small cars cleaner. Others warn of a affordability crunch. The government has not announced any subsidy for small car buyers under this policy.

What happens next

Carmakers have until April 2027 to comply. They are already lobbying for more time and softer targets. The Society of Indian Automobile Manufacturers (SIAM) has sought a review, citing cost pressures. The transport ministry has not indicated any relaxation yet.

For now, the message is simple: the fleet has to get cleaner. How fast, and at what cost, is still being negotiated.