India’s Corporate Average Fuel Consumption (CAFC) regulations
A brief analysis: What is it and what lies ahead for the automakers?
CAFC regulations were proposed by the Ministry of Power of the Govt. of India, in collaboration with the Bureau of Energy Efficiency, to set the fuel consumption targets for every automaker in the country from 2017 fiscal year onwards[1]. These standards aim to improve the fuel efficiency of the automobiles in the wake of rising costs of importing oil, led by an increasing demand for fuel, primarily by the automobiles. So far, many of the advanced (USA, EU), as well as, developing nations (China, Mexico) have introduced such regulations to encourage efficient consumption of fuel. So, it was high time India came up with its set of rules, and they did so by releasing the ‘CAFC’ regulations in 2015. I will briefly go through the rules and look upon some of the specific details of the policy, followed by a multi-dimensional analysis of the policy as well as touch upon a few other relevant issues.
The Regulation
Some quick facts first:
a) We are considering only passenger vehicles (weight is under 3,500 kg and have no more than nine seats); commercial vehicles, trucks are excluded, unless specifically mentioned.
b) Corporate Average mean Sales-volume weighted average for every automaker.
So, the regulation mandates that from 2017 April onward, every automaker’s annual
Corporate average fuel consumption (CO2) < a * (W — W0) + c,
Where, W = corporate average weight of its vehicles, and ‘a’, ‘Wo’ and c are constants. The policy provides the necessary conversion factors to convert fuel consumption of gasoline, diesel, CNG, LPG fuels to CO2 emission-equivalent values. So, the underlining basis of the policy is less CO2 emission means less fuel consumption.
In other words, every automaker’s average CO2 emissions should be below a constant ‘c’ if the average weight of their vehicles sold is W0. More weight means more allowance and vice versa. So with the given values[Appendix], the regulation mandates that from 2017 Apr onwards,
The annual corporate average CO2 emissions for every automaker should be <130g/km till 2022 and <113g/km CO2 from 2022 onwards (if corporate average weight is W0)
Analysis of the Regulation
So, having laid out the policy rules, let’s analyze the information in more detail.
Global Perspective: Let’s give some perspective to these numbers by comparing it with the regulations in other parts of the world. The following image provides the regulatory limits in various countries along with their timelines.
As we can see, the target of 113g/km, by 2022, seems to be fairly in line with some of the strictest regulations such as those of China and USA, an even much stringent than the targets in Korea, Brazil, and Mexico. But as we examine more carefully, we can see that the historical performance of CO2 emissions in India is one of the lowest in the world (~140g/km in 2010), only a bit higher than the emission levels in Japan and EU. So,
It’s more about the slope of the curve rather than the target in 2025. The rate of reduction in CO2 emissions, from the current state, is more important than the final target.
We need to compare the target from the standpoint of the current emission levels in the country. We can see from the graph that the average CO2 emission level in India was already 136g/km by 2012.[2] So, the target of reaching 130g/km of CO2 emissions from the 2012 level of 136g/km mandates an annual improvement of just over 1g/year till 2017 and 2.3g/year till 2022.
In terms of percentage points, India needs an overall annual reduction of less than 2% only, much lower than that of any other nation.
Some of the factors that could explain the current status of low emissions in India are as follows:
1) The biggest cause is the weight of the vehicle. As per a 2008 report, published by the Global Fuel Economy Initiative, which compared the average weight of the vehicle in different countries, India had the lightest vehicle fleet, weighing around 950kgs in average which is almost 150kgs lighter than non-OECD average and a massive 300kgs lighter than OECD average[3]. Light cars mean low emissions.
2) Tax structure: India still has a tax break for sub-4m cars, which leads to a huge price advantage to smaller cars, encouraging manufacturing and sales of smaller and compact cars. So, the overall market share of small cars in India is very high, resulting in lower CO2 emissions, on average.
3) Safety standards: The government is still working on instituting indigenous safety standards and ratings on the same lines as that of European NCAP. In the absence of much-needed safety standards, the weight of the vehicle stays lower, compromising the safety of the passengers. So again, lighter vehicles mean less CO2.
4) Emission standards: The BS4 emission standards are no match for the much stringent Euro 6 standards in the Eurozone. With lower emission standards to meet, the vehicles end being lighter than their European counterparts.
Of course, there could be many more reasons, including purchasing power, market dynamics, alternate means of transportation, infrastructure, etc.
So, the good thing is that a small-car centered tax structure combined with weaker safety and emission standards have led India to have one of the lightest vehicle fleets in the world, leading, in turn, to a relatively lower emission levels than other nations. But, although the final target numbers seem to be in-line with the global standards, the rigorousness of the policy is severely questioned when we examine it from the perspective of the ‘current status’ of the Indian auto industry.
Weight factor “a”: Emission limits are set according to the weight of vehicle meaning that heavier cars are allowed higher emissions than lighter cars. But, by how much? In the equation, the factor “a” accounts for the incremental increase in CO2 emission per unit increase in weight.
So according to the regulation[Appendix], for every 100 kg increase in the weight of the vehicle, an additional emission of 5.6 g/km of CO2 is allowed. Just for reference, this allowance is 3.3g/CO2 in Europe; a difference of almost 1.7 times !!
Just as an experiment, I tried to figure out the real world change in CO2 emission with an increase in the weight of the vehicle. Maruti has the biggest line-up in the Indian market and so I decided to plot all Maruti vehicles’ CO2 Vs weight and find out the real world “a” for myself (official data from the website).
As we can see, the “a” factor is 0.088, which means for Maruti’s vehicles, an increase of 100kgs in vehicle weight leads to an increase of 8.8g/km of CO2 emission. (Very generalized assumption though). For Honda, it comes out to be at 8.6g/km per 100kg.
So, what do we infer from this difference between real world values and policy regulations?
First of all, a higher “a” factor means a weaker penalty for automakers to control the weight of the vehicle. A lower ‘a’ factor pushes the automakers to use better technologies to accommodate the increase in weight, which, by the way, is bound to happen due to the introduction of tougher safety standards all over the world.
Now, more importantly, in the current situation, there is a good amount of incentive for an automaker to reduce the weight of the car. As the policy allows for only 5.6g/km increase in CO2 emission per 100 kg increase in weight, whereas automakers can currently manage only 8.8g/km, the plan keeps a good check on maintaining the weight of the vehicle under the stipulated W0 level.
The policy, though lenient compared to European standards, smartly undercuts the real world characteristics and forces automakers to innovate and avoid making heavier vehicles.
With heavier vehicles automakers lose; lighter ones’ automakers gain
Diesel: One important factor we totally ignored in the previous sections was the effect of different fuels, such as diesel, on the average corporate emission.
In fact, diesel cars accounted for 53 % of all new registrations in EU 2013, slightly less than in 2012. This situation differs notably from other main markets. The US, Chinese and Japanese markets are all dominated by gasoline-powered cars, with diesel playing almost no role. One market of note that has embraced diesel technology, however, is India, where the diesel share was around 50% in 2013[4].
So, what about diesel? Diesel engines are much more fuel efficient than gasoline in terms of CO2 g/km. But, although diesel fuel vehicles have higher fuel economy and lower CO2 emissions rates than comparable gasoline vehicles, they emit other dangerous pollutants. Diesel fuel vehicles meeting current European standards emit three times as much nitrogen oxides, imposing significant health and environmental costs [5]. We all know about the recent Volkswagen Scandal which involved usage of ‘defeat devices’ to control the emission of NOx particulates by its diesel engines.
From a manufacturer’s point of view, a higher share of diesel vehicles would automatically improve its corporate average as diesel cars are more fuel efficient. So, by having a fuel efficiency target, based on CO2 emissions, we can save on the fuel costs, but we would have to pay back in the form of more nitrogen oxides in the air. The government should mitigate this critical loophole with the simultaneous release of stricter regulations on emission standards such as Bharat 5 and 6 (Currently, compliance to only BS4 is mandatory).
Strict emission (which include NOx) standards need to follow tougher fuel efficiency targets to achieve a more fuel efficient as well as the environment-friendly market.
So in conclusion, from the current standpoint, I believe that given the high concentration of smaller cars as well as a high diesel penetration, the targets set in the policy are quite lenient. But, as BS 6 emission standards and tougher safety standards kick in, automakers can face harder challenges in the future to meet the CAFC regulations.
Other external factors such as a decrease in diesel sales due to environmental factors (Delhi Diesel Ban by NGT) and an increase in sales of bigger vehicles (longer than 4m sedans and SUV’s), would ensure that the automakers keep a keen eye on maintaining a lower CO2 footprint.
More information on the implementation policies, penalty guidelines and incentives for alternate energy technologies is expected to be released soon by the Ministry of Road Transport and Highways.
Other comments:
1. In general, these policies (all over the world) don’t consider the actual distance traveled by the vehicle. I mean to say that, hypothetically, for an automaker, if 100 fuel efficient vehicles (CO2 below the regulated target) cover 100kms, but 50 inefficient ones run 500 km. Then, on paper, the automaker is safe as its corporate average is all right, but in the real world, the emissions would be much higher than the stated corporate average. Since the regulation, implicitly, assumes that all vehicles travel similar distances, there is a significant chance of deviation between the intended and resulting real world values.
2. Another factor the CAFC regulations, probably, did not mention clearly was the phase-in timings. In Europe, the regulations kick in gradually with only a certain percentage of the new fleet vehicles mandated to meet the requirements before 100% of the vehicles are required to meet the regulations. Such measures help introduce tougher standards in a gradual fashion instead of stipulating a fixed number and a fixed deadline abruptly, as is the case with India’s regulation.
Sources:
1. Ministry of Power notification, 23rd April 2015
2. http://www.theicct.org/sites/default/files/info-tools/pvstds/India_PVstds-facts_dec2014.pdf
3. François Cuenot and Lew Fulton et al. International comparison of light-duty vehicle fuel economy and related characteristics.Unpublished working paper: Page 9
4. Euro Pocketbook 2014, ICCT: Page 7
5. Linn, Joshua, Explaining the Adoption of Diesel Fuel passenger Cars in Europe (August 17, 2015). Resources for the Future Discussion Paper №14–08-REV: Page 5
Appendix
Special Note: The original unit of the equation is l/100 km, but this value is supposed to be derived from the CO2 emissions of the vehicle. In other words, we would have to measure the CO2 emissions first and based on a formula (conversion factor) we can derive the fuel consumption in l/100km, as used in the equation. The policy specifies a constant multiplier to convert CO2 emissions to fuel consumption in l/100km.
Currently, the ARAI certified fuel consumption figures or the official figures released by the automakers are calculated from the CO2 as well as CO and HC emissions. For the purpose of evaluating CAFC regulations, it seems that the regulatory authority will consider only the CO2 values. (Official notification on testing procedures is still being drafted)
