Govt proposes scrapping three-manufacturer cap under CAFE 3 pooling framework

The proposed change assumes significance in light of cumulative penalties of around ₹7,300 crore imposed on eight carmakers for non-compliance with CAFE norms in FY23.

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New Delhi: 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 provide automakers more flexibility in meeting fuel-efficiency targets.Under the September 2025 draft of the CAFE 3 norms, pooling was permitted among “not more than three” manufacturers. However, a revised proposal issued in January 2026 replaces this with “not less than two” manufacturers and does not specify any upper limit, effectively scrapping the earlier cap, according to a report 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 purpose of calculating average fuel consumption.

Greater compliance flexibility

With compliance assessed at the pooled level, companies with relatively less fuel-efficient portfolios could combine with manufacturers having cleaner fleets, provided the combined average meets the prescribed standard.

The proposed change assumes significance in light of cumulative penalties of around ₹7,300 crore imposed on eight carmakers for non-compliance with CAFE norms in FY23.

For instance, if one manufacturer exceeds the emission limit while another performs better than the standard, the combined fleet average could potentially meet the target under a pooling arrangement, shifting compliance evaluation from the individual to the pooled entity.

The CAFE norms are administered by the Bureau of Energy Efficiency under the Ministry of Power and apply to M1 category vehicles — passenger cars such as hatchbacks, sedans, SUVs and MPVs with up to eight seats and a gross vehicle weight not exceeding 3,500 kg.

Revised penalty structure

The proposal also modifies how penalty liability is structured within a pool.The earlier 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 now requires the pool manager to ensure that all participating manufacturers pay their respective penalties.Pooling guidelines specify that while the pool manager would be liable “in the first instance” for submission of pooled compliance data, all participating manufacturers must file a joint and several liability declaration. This makes each member legally responsible for obligations and penalties under Section 26(2) of the Energy Conservation Act, 2001.Pooling arrangements must be registered with the Bureau of Energy Efficiency, and the pool manager must submit an annual pooled compliance statement within 90 days of the end of the compliance year (April 1–March 31), with a possible 30-day extension. Non-compliance would attract penalties recoverable as arrears of land revenue.

Manufacturers can be part of only one pool during a pooling period of at least one year, aligned with reporting cycles. The proposal also allows pooling at any stage, including during adjudication before penalties are imposed.

Industry divisions over CAFE 3

The CAFE 3 norms are proposed to take effect from April 1, 2027, and remain in force until March 31, 2032.The September 2025 draft replaced the current fixed emission benchmark with a weight-linked annual fuel-consumption formula, creating differentiated targets based on the weighted-average mass of a manufacturer’s portfolio and progressively tightening standards over a five-year cycle. An earlier June 2024 draft proposing a uniform cap of 91.7 g/km was later withdrawn.

Under the current CAFE 2 regime, carmakers are required to meet a fleet-average CO2 emission target of around 113 g/km.

The September 2025 draft had also proposed a special dispensation for certain small petrol cars — with unladen mass up to 909 kg, engine capacity not exceeding 1,200 cc and length capped at 4,000 mm — allowing a 3 g/km reduction in manufacturer-declared CO2 emissions, subject to a cumulative cap of 9 g/km per model per compliance period.

That proposal led to differences within the industry. Automakers including Tata Motors Passenger Vehicles, Mahindra & Mahindra, JSW MG Motor India, Hyundai Motor India and Kia India opposed special concessions, arguing they could distort competition. In contrast, Maruti Suzuki India, Toyota Kirloskar Motor, Honda Cars India and Renault India supported differentiated treatment for smaller vehicles.

Sources told Moneycontrol, the Bureau of Energy Efficiency is considering dropping the special dispensation for small cars weighing less than 909 kg in the final notification of the CAFE 3 norms.

The revised pooling proposal, if adopted, could reshape compliance strategies for carmakers as India tightens its fuel-efficiency standards over the next regulatory cycle.