The Union Ministry of Power, in consultation with the Bureau of Energy Efficiency (BEE), has issued a new draft amendment notification for the Corporate Average Fuel Efficiency (CAFE) Phase II norms. While the regulation formally institutes a market-oriented system for tracking compliance credits and debits among Original Equipment Manufacturers (OEMs), it introduces a direct buyout mechanism that weakens the compliance.
Under this new clause, non-compliant vehicle manufacturers can bypass statutory liabilities by purchasing regulatory credits directly from the BEE at a fixed rate of Rs 2,500 per gCO2/km—effectively halving the Rs 5,000 penalty framework originally established under the Energy Conservation Act.
This has serious implications for upcoming CAFE III norms, which will also rely on credit trading frameworks. This new proposal disconnects compliance from actual real-world emissions reductions by the performing OEMs. By creating an artificial and infinite supply of government-issued credits out of thin air, the policy undercuts the private trading market, capping the financial value of performance and stripping away the competitive advantage of progressive OEMs that invested in clean-tech innovation and electrification.
Furthermore, because these buyout revenues bypass the automotive engineering ecosystem entirely—with most of it diverted into general state accounts—this becomes an arbitrary revenue-generating stream for the state that does not offer any funding or incentive for the technological development for low carbon transport.
The amendment introduces a structured system using a “Passbook” to record, track, and carry forward “Credits” (accrued when an OEM performs better than the target) and “Debits” (shortfalls when an OEM exceeds target emissions).
It also permits “Pooling,” allowing OEMs to trade or exchange credits on mutually agreed terms to achieve compliance within a 5-year block (FY 2022-23 to FY 2026-27), with any un-traded credits lapsing at the end of the block.
A major systemic shift allows non-compliant OEMs to completely bypass peer-to-market trading by directly buying credits from the BEE.
All compliance penalty funds and buyout revenues are directed to the Central Energy Conservation Fund, with 90 per cent transferred to state governments (apportioned by vehicle sales volume) and 10 per cent retained by the Centre.
The proposed amendment halves the financial liability. Under the Energy Conservation Act, a strict enforcement penalty rate was previously established at Rs 5,000 per violation metrics. The draft amendment allows non-compliant OEMs to offset their debt balance through a direct buyout from BEE at a fixed rate of Rs 2,500 per g CO2/km. This creates a state-sanctioned route to cut non-compliance liabilities exactly in half.
Technically, this is replacing a penalty with an ‘administrative fee’. Instead of facing statutory enforcement penalties or being forced to adopt cleaner vehicle technologies, non-compliant OEMs can treat this buyout as a predictable, heavily discounted cost of doing business.
Market credits are generated when a progressive OEM outperforms standards through expensive technical upgrades. Conversely, BEE’s buyout credits are created out of thin air by a regulatory body—entirely disconnected from any actual physical or technological reduction in emissions.
Because BEE can sell credits without a matching volume of real-world carbon reductions, the mechanism allows the total net emissions of the country’s fleet to artificially inflate, breaking the core principle of a cap-and-trade system.
By establishing a statutory buyout floor at Rs 2,500, BEE effectively sets an artificial price ceiling for the entire private trading market. No non-compliant OEM will ever buy market credits from a clean peer at a fair value above Rs 2,500, severely reducing the economic reward for progressive manufacturers.
OEMs that invested heavily in R&D, electrification, and powertrain efficiency under the impression that their surplus credits would command premium market rates are left stranded. The state-driven supply of cheap, infinite regulatory credits devalues private market assets.
BEE acts as a non-market actor, fixing an arbitrary, non-dynamic price (Rs 2,500) for five financial years instead of letting prices reflect actual supply-demand dynamics or manufacturing complexities.
In a market mechanism, credit revenues flow directly from non-compliant OEMs to clean OEMs, subsidising and accelerating clean-tech research. Under this draft, the buyout revenue goes to the government, with 90 per cent diverted into general state accounts based on regional vehicle sales distribution. Consequently, the capital paid by polluters bypasses the automotive engineering innovation, with no support for the actual technology development.
An analysis of global automotive compliance frameworks shows how emissions credit systems are governed internationally versus the mechanism outlined in India’s draft CAFE II amendment. Globally, regulators do not manufacture or sell compliance credits to industry players to offset shortfalls.
California (Advanced Clean Cars / ZEV Mandate): The California Air Resources Board (CARB) awards credits exclusively to OEMs based on the number of zero-emission vehicles (ZEVs) they manufacture and sell. Automakers facing a shortfall must purchase these credits on the open market directly from over-performing peers. CARB never sells credits to non-compliant automakers.
Europe (EU fleet CO2 standards): The European Commission defines strict corporate average fleet targets. Automakers can voluntarily enter into emissions “pooling” agreements where an under-performing fleet is legally grouped with a high-performing EV maker to avoid fines. The EU regulatory body does not generate or sell bypass credits.
China (dual-credit policy): China’s Ministry of Industry and Information Technology mandates an open internal trading platform where automakers short on New Energy Vehicle credits must buy surplus NEV credits directly from competitors. The government does not supply compliance credits.
Globally, while governments do not typically sell compliance credits to OEMs, they utilise mechanisms to generate revenue and enforce climate action. Rather than a buyout, regulators impose direct penalty for missing fleet standards. For example, the European Commission levies a penalty for every single gram of CO2/km exceeded. This acts as an enforcement penalty, not a credit buyout.
In economy-wide industrial cap-and-trade sectors—such as the EU Emissions Trading System (EU ETS) — does generate massive revenue by auctioning off a set cap of carbon allowances to heavy industries, power plants, and maritime operators. However, the key distinction is that the total volume of these allowances is strictly capped and decreases every year, forcing an overall drop in emissions.
When governments earn from non-compliance fines or ETS allowance auctions, the capital is also ring-fenced. For instance, EU ETS revenues are directed into dedicated vehicles like the EU Innovation Fund and Modernisation Fund, which flow back into financing low-carbon technologies and renewable energy infrastructure.
Providing a regulatory agency with the authority to issue and sell credits to non-compliant operators is avoided globally. In standard cap-and-trade networks, a credit must represent an actual, physically verified reduction in emissions by an industry operator. If a regulator possesses the right to sell infinite credits out of thin air, this detaches the financial market from real world improvements.
When a regulator sets a fixed buyout fee, it creates a legislative price ceiling. No non-compliant OEM will pay a clean manufacturer more than the regulator’s buyout price, undercutting the free market and reducing the financial incentive for progressive manufacturers to invest in technological breakthroughs.
There is also a lesson from India’s green energy market that establishes peer-to-peer trading as the standard rule for compliance, treating state intervention only as a strict exception. Under the renewable consumption obligations managed by the Central Electricity Regulatory Commission (CERC), obligated entities facing shortfalls must purchase market-driven Renewable Energy Certificates (RECs) from over-performing peers via power exchanges. A state-administered “Buyout Price” mechanism and the CERC-notified rate, is strictly a fallback safety valve triggered only if a severe market shortage occurs. Even under this exception, the revenue is ring-fenced, with up to 75 per cent directed to State Energy Conservation Funds to drive clean technology development.
This reinforces why the proposed “BEE Buyout Option” under the draft CAFE Phase II automotive amendment is an unprecedented anomaly. Even in the domestic frameworks like the perform and Trade (PAT) scheme and the carbon credit trading scheme, BEE acts as a neutral regulator and never creates or sells compliance credits. Shortfalls in those industrial sectors must be offset by purchasing certificates anchored to real, physically verified savings from active market peers. Non-compliance triggers statutory penalties rather than a state buyout.
By directly manufacturing and selling credits for a cut-rate administrative fee under CAFE II, the state devalues peer-to-peer clean innovation. This becomes the only sector where non-compliance capital is diverted into general state coffers instead of supporting progressive industrial transitions.
For genuine technical progress, BEE must replace this anomalous revenue-generating bypass with a robust framework that legally rewards over-performing automakers and forces real, physically verified emissions reductions.