Stringent efficiency targets can be an industrial policy for Atmanirbhar Bharat
As India continues to suffer from COVID-19, vehicle manufacturers are using the related sales slump as an opportunity to seek a 2-year delay in the implementation of Phase II of the corporate average fuel efficiency (CAFE) standards. The industry regularly employs this tactic in the case of any drop in sales, and I considered the question of the stringency and timing of India’s fuel efficiency standards in a blog last summer. Now, for a fresh perspective, let’s take a look at the European situation with respect to vehicle carbon dioxide (CO2) emission standards and COVID. Do the actions of policymakers there offer some guidance for how Indian policymakers could best treat this request?
The European passenger car market is similar to India’s in terms of fuel mix, but Indian cars have always been smaller, lighter, and less powerful than Europe’s. Just a few years back, the fleet average CO2 emissions of Indian passenger cars was close to the average for European cars and it was fair for both to set the fleet average target at 130 grams (g) of CO2 per kilometer (km) in the first phase of their fuel efficiency standards. However, today the European Union has much lower fleet average CO2 in spite of having bigger, heavier, and more powerful vehicles. At the start of 2021, Europe implemented a phase II target of 95 gCO2/km. As a result, all manufacturers geared up to meet the target and Europe’s fleet average dropped from 122 gCO2/km in 2019 to 97 gCO2/km in 2020 (Figure 1). Currently adopted EU policies also include more stringent standards for 2025 and 2030, lower by 15% and 37.5%, respectively.
At the same time, there has been a phenomenal increase in sales of electric vehicles (EVs) in the European Union, from an average of 3% of new sales in 2019 to an impressive 11% in 2020; with this, the European Union surpassed China as the world leader in terms of the EV share of new sales in 2020. This shows that stringent fuel efficiency targets go hand in hand with promoting EV penetration in the market.
While India has set an ambitious target that EVs be 30% of new car sales by 2030, there are only modest CO2 targets for the future. For fiscal year (FY) 2020–21 through December 2020, the fleet average CO2 performance of Indian manufacturers was 120.9 gCO2/km with fleet average curb mass of 1,076 kilograms; this requires a 3% annual reduction for the next 3 years to achieve a 110.0 gCO2/km target for FY 2022–23. With an easier target in sight than EU manufacturers, Indian manufacturers have continued to invest in conventional engine technologies, and mass market vehicles like Dzire are evidence that automakers could reduce fuel consumption by using incremental low-cost technologies. Some of the technologies used in Dzire include low viscosity oils, low-rolling-resistance tires, aerodynamic improvements, and low-cost internal combustion engine technologies, and these can be replicated by other manufacturers. We estimate this has the potential to reduce the fleet average CO2 level by 2%–3%.
Other low-cost technology options like compressed natural gas (CNG) vehicles are also finding good acceptance among Indian customers. For CNG in particular, this is due to its fuel consumption, which is approximately 20% lower than gasoline vehicles, and the cheaper fuel cost. The introduction of several new CNG models along with improved CNG infrastructure resulted in the CNG share increasing to 5.6% of new car sales in FY 2020–21 through December. In the event that the CNG share increases to 15% by 2022, then the total benefit due to CNG would be 2.3 gCO2/km. There would be an additional benefit of 0.3 gCO2/km with the increase in the fleetwide target to 110.3 gCO2/km that would come as a result of a larger number of the heavier CNG vehicles.
India’s present fuel consumption standards also allow manufacturers to use flexibility mechanisms—derogation factors for technologies such as start-stop, tire pressure monitoring systems, regenerative braking, and 6-speed transmission—that provide additional CO2 reductions. The maximum benefit from these technologies is capped at 9 gCO2/km per vehicle. Leaving aside the mini and compact passenger car segments, sedans and SUVs can easily incorporate these technologies to further reduce the fuel consumption by 5.4 gCO2/km, and the cost of these is much lower than EVs or hybrids. Indeed, in Europe, it was quite natural for manufacturers to capture all the benefits from the eco-innovation credits and pools systems offered by the 2021 fuel consumption regulation before venturing into EVs.
The share of new electric and hybrid vehicles sales in India is currently 0.2% and 0.04% respectively, 50 times lower than Europe. Nevertheless, just a 1% share for EVs in new car sales in India can reduce the fleet average fuel consumption by 2.7 gCO2/km, and a similar reduction can be achieved through a 5% sales share for strong hybrids. Figure 2 shows that the combined benefit from these different technologies can reach a level of 105.2 gCO2/km. Heavier electric or hybrid vehicles will further increase the target by 0.2 gCO2/km to 110.5 gCO2/km for FY 2022–23, with just 1% of new EV sales. Indian manufacturers have thus far been adopting low-cost options first and this also suggests they’re likely to pursue electrification only when future stringent targets make it a necessity.
Both Europe and India are undergoing economic turmoil as a result of COVID, but Europe’s response has thus far been quite different. The introduction of tighter CO2 emission standards for passenger cars along with economic recovery packages announced by countries such as France, Germany, Spain, Austria, and Italy have incentivized EV sales. The existing scrappage scheme in France was also revised to maintain maximum aid amounts to customers who bought electric or plug-in hybrid vehicles. Low-income consumers were specifically targeted, and the combined incentive could go as high as €12,000 if purchasing an EV in France.
To bring the shift to EVs in India and create a multibillion-dollar market opportunity for Indian industry in the development, manufacturing, and maintenance of EVs, stringent CAFE targets for FY 2022–23 should be looked at not only as a way to protect our climate and improve energy security, but also as an industrial policy for Atmanirbhar Bharat.