What’s new in the draft CAFE-III norms? | Explained

The story so far: The Centre on Thursday (July 17, 2026) released the third draft of the Corporate Average Fuel Efficiency (CAFE)-III norms for passenger vehicles, proposing to recognise ethanol, compressed biogas (CBG) and other biofuels in compliance calculations by allowing manufacturers specified reductions in declared tailpipe carbon dioxide emissions.What does the latest draft CAFE-3 propose?The draft, open for stakeholder comments until August 6, comes after a year-long tussle between manufacturers of small and large cars over the compliance formula.It broadly retains the changes introduced in the second draft, including a flatter weight-adjustment curve than the original September 2025 proposal, reducing the compliance advantage for heavier SUVs while easing targets for lighter vehicles. Overall fleet-wide emission targets have also been relaxed by around 21% compared with the original proposal.Manufacturers will be required to progressively improve the fuel efficiency of their fleets, with the target tightening from 3.996 litres per 100 km (94.76 gCO₂/km) in 2027-28 to 3.327 litres per 100 km (78.90 gCO₂/km) by 2031-32. Compliance will be assessed over two blocks—an initial three-year period followed by a two-year period—instead of annually.The draft introduces Carbon Neutrality Factors (CNFs), allowing specified reductions in declared CO₂ emissions for vehicles running on ethanol, flex-fuel ethanol, CBG and other biofuels before compliance is assessed. It also proposes compliance incentives for approved fuel-saving technologies and continues to offer super credits for electric, plug-in hybrid, strong hybrid and flex-fuel vehicles.Manufacturers exceeding their targets will earn tradable compliance credits, while those falling short can purchase credits from other manufacturers or the Bureau of Energy Efficiency (BEE) to meet their obligations.What has changed?The latest draft leaves most of the April proposal unchanged, suggesting the government has broadly stuck to the compromise it arrived at after months of intense negotiations between manufacturers of small cars and larger SUVs. The April version had largely defused the industry’s biggest point of contention by replacing the earlier, steeper weight-adjustment curve with a flatter one and softening the compliance regime.The weight-adjustment curve was flattened, changing the way emission targets vary with vehicle weight. Instead of a uniform slope of 0.002 proposed for all five years, the latest draft proposes a slope of 0.00158 in the first year, gradually reducing to 0.00131 in the fifth year.The draft also removes a distinct relaxation of 3 grams while calculating CO2 emissions for small cars weighing less than 909 kg, and powered by sub-1200 cc that sharpened the divide among automakers has also been removed.It also introduced mechanisms such as carbon credit trading and pooling, allowing manufacturers that outperform their emission targets to sell credits to those that fall short. The shift marked a move away from the polarising “small car versus big car” debate towards improving the overall emissions performance of a manufacturer’s fleet.Why were there differences between various automakers?One of the most contentious issues in the CAFE-III discussions was 3 g CO₂/km benefit for smaller cars for meeting emission targets. Tata Motors was among the strongest opponents, arguing there was “absolutely no justification” for offering concessions to small cars, particularly when manufacturers of larger vehicles were investing heavily in electrification to meet future norms. “Incorrect facts and narratives are being pushed in a very irresponsible manner by the makers of so