MC EXCLUSIVE Govt proposes removal of CAFE pooling cap, expands compliance flexibility for carmakers

The CAFE 3 norms are proposed to take effect from April 1, 2027 and remain in force until March 31, 2032.

• Government has proposed removing cap on CAFE pooling partners.
• Penalty responsibility in pools now shared by all members.
• Special concessions for small cars may be dropped in final norms.

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The government has proposed removing the three-manufacturer cap in the pooling mechanism under the Corporate Average Fuel Efficiency (CAFE) 3 framework, a move that could give carmakers greater flexibility in meeting fuel-efficiency targets. The proposal also revises how penalties would be handled within such pools, according to official documents reviewed by Moneycontrol.

Pooling allows carmakers to combine their fleet fuel-efficiency numbers to meet compliance requirements. When companies form a pool, they are treated as a single manufacturer for the purposes of calculating their average fuel consumption.

The September 2025 draft CAFE 3 norms had allowed pooling by "not more than three" manufacturers. However, a new proposal issued in January 2026 replaces this with "not less than two" manufacturers and does not specify an upper limit. In effect, the earlier cap has been removed, while the provision treating a pool as "one manufacturer" for compliance purposes remains unchanged.

Because compliance would be assessed at the pooled level, carmakers with relatively less fuel-efficient portfolios could potentially combine with companies that have cleaner portfolios, provided the combined fleet meets the prescribed standard. This becomes significant against the backdrop of cumulative penalties of around Rs 7,300 crore imposed on eight carmakers for non-compliance with CAFE norms in FY23.

For instance, if one carmaker’s fleet exceeds the prescribed emission limit while another meets or exceeds the standard, their combined fleet average could meet the target if they form a pool. Compliance would then be evaluated at the pool level instead of individually.

The CAFE norms are overseen by the Bureau of Energy Efficiency (BEE) under the Ministry of Power and apply to M1 category vehicles. These include passenger cars such as hatchbacks, sedans, SUVs, and MPVs with not more than eight seats, including the driver’s seat, and a gross vehicle weight not exceeding 3,500 kg.

The proposal also changes how penalty responsibility is structured within a pool. The September 2025 draft had stated that the manufacturer nominated as the "pool manager" would be responsible for paying any penalty imposed on the pool. The revised wording states that the pool manager must ensure that all participating manufacturers pay their respective penalties.

The BEE did not respond to requests for comment.

The accompanying pooling guidelines further state that while the pool manager would be liable "in the first instance" for submission of pooled compliance, all participating manufacturers must submit a joint and several liability declaration. This means all members of a pool remain legally responsible for obligations and penalties under Section 26(2) of the Energy Conservation Act, 2001.

The proposal also provides that pooling may be permitted at any stage and can be considered during adjudication before penalties are imposed. At the same time, a manufacturer may be part of only one pool in a given pooling period of at least one year aligned with reporting periods.

Pooling arrangements must be registered with the BEE, and the pool manager must file an annual pooled compliance statement within 90 days of the end of the compliance year (April 1-March 31), with an extension of up to 30 days. Non-compliance would attract penalties under the Energy Conservation Act, which are recoverable as arrears of land revenue.

CAFE 3 and industry differences

The CAFE 3 norms are proposed to take effect from April 1, 2027 and remain in force until March 31, 2032. Under the September 2025 draft, certain small petrol vehicle models -- with an unladen mass of up to 909 kg, engine capacity not exceeding 1,200 cc and length capped at 4,000 mm -- were given a special provision in fleet-average calculations. These vehicles were allowed a 3 g/km reduction in manufacturer-declared carbon dioxide (CO2) emissions, subject to a cumulative cap of 9 g/km per model in each compliance period.

Under the current CAFE 2 framework, carmakers are required to meet a fleet-average CO2 emission target of around 113 g/km. The September 2025 draft CAFE 3 framework replaced a fixed-emission benchmark with a weight-linked annual fuel-consumption formula, resulting in differentiated targets based on the weighted-average mass of a manufacturer's portfolio and progressively tightening standards over the five-year cycle. An earlier draft issued in June 2024 had proposed a uniform cap of 91.7 g/km, which was later withdrawn.

The proposed weight-based relaxations led to differences within the industry. Automakers such as Tata Motors Passenger Vehicles, Mahindra & Mahindra, JSW MG Motor India, Hyundai Motor India and Kia India opposed special concessions, arguing that they could distort competition. In contrast, Maruti Suzuki India, Toyota Kirloskar Motor, Honda Cars India and Renault India supported differentiated treatment for smaller and lighter vehicles.

According to sources, the BEE is considering dropping the special dispensation for small cars weighing less than 909 kg in the final notification of the CAFE 3 norms.