The Ministry of Power’s draft CAFE-III standards, released in July 2026, mark another sluggish step in a long-delayed journey. Set to govern fuel efficiency light-duty passenger vehicles from FY2027-28 through FY2031-32, this framework is a chance to drive bold clean-vehicle innovation, maximize fuel savings, and accelerate fleet electrification. At a time when the country is reeling under a crippling energy crisis, an ambitious policy could have fortified national energy security, curbed heat-trapping greenhouse gases, and cleared toxic tailpipe emissions. Instead this newly announced proposal falls hugely short of expectations.
The current proposal falls short of the benchmarks needed to drive this clean transition. An analysis of the policy’s trajectory—from early proposals in 2024 through the September 2025 draft to the July 2026 notification—reveals a troubling trend. Looking back, the original draft appears more progressive than its successive revisions, which have steadily introduced a range of flexibilities, paper credits, and regulatory loopholes. Despite a few necessary improvements, the July 2026 notification dilutes real-world reductions, creating a framework where automakers can achieve compliance easily on paper rather than on the road.
Public and policy understanding of these technical standards often remains vague and inadequate, limiting meaningful engagement on a crucial regulatory mechanism. If these systemic loopholes are left unaddressed during finalisation of the norms, it will jeopardise this policy instrument required to maximise energy savings, improve urban air quality, and secure India’s zero-emission future.
The headline numbers for the norms of the July 2026 draft present an image of ambition. The notified annual targets step corporate average emissions down from 94.76 gCO₂/km in FY2027-28 to 76.77 gCO₂/km by FY2031-32. On paper, this target curve represents a 21 per cent to 34 per cent tightening over CAFE-II, depending on the specific year.
Even this could have been better in terms of the global good practice and what Indian industry is capable of achieving. However, looking strictly at headline figures masks the reality of the effectiveness of these targets. In the July 2026 draft, these are compromised because automakers are permitted to combine multiple accounting discounts to meet their corporate averages without delivering equivalent emissions reductions. This needs to be understood well.
The CAFE norms are expressed through sales weighted corporate fuel economy standards that the automakers have to meet fleet-wide. These are different from the per vehicle standards under the mass emissions norms of Bharat Stage Standards. The regulators use a vehicle weight and a slope parameter in a graph that is expressed in a form of an equation. Because heavier cars naturally burn more fuel than lighter ones, regulators avoid imposing a rigid, one-size-fits-all emissions limit. Instead, they craft a flexible target curve based on a vehicle’s weight relative to the industry average. This uses the market’s average weight as a baseline benchmark, raising allowable emissions for heavier fleets and lowering them for lighter ones.
The starting point for this curve is a baseline constant—the core efficiency target expected at that market average weight. Connecting it all is the slope parameter, which dictates how steeply allowable emissions rise alongside vehicle weight. A steeper slope forces heavy vehicles to make aggressive efficiency gains, whereas a flatter slope softens targets for lighter, mass-market cars. Together, these tailored parameters ensure automakers face proportional standards designed around the specific mix of vehicles they build.
Behind these technical formulas that set vehicle emission targets, subtle mathematical changes quietly reshaped the rules of the game between the drafts. Originally, the September 2025 proposal applied a steep, uniform slope to determine allowable carbon emissions based on a vehicle’s weight. By July 2026, regulators subtly flattened this curve to a much lower stepped range while simultaneously raising the baseline constant. On paper, it looks like a minor technical tweak, but in reality, a flatter slope acts as a soft cushion for lighter, high-volume cars by granting them substantially more lenient emission hurdles.
Conversely, regulators also stepped in to reverse two major flaws from earlier drafts. The industry reference weight parameter was raised from an understated 1,170 kg in September 2025 to a more realistic 1,229 kg in July 2026, creating a stricter baseline for lighter fleets. By increasing the industry reference weight, regulators set a baseline that reflects how heavy cars actually are today. Because the benchmark is now heavier, automakers that build lighter cars can no longer rely on an artificially low baseline to pass inspection easily—they face a stricter, more realistic requirement to improve engine efficiency.
India continues to measure compliance against the outdated Modified Indian Drive Cycle (MIDC), which creates a notorious gap between laboratory performance and real-world emissions. While the July 2026 notification introduced mandatory dual reporting under both MIDC and the global World Harmonized Light Vehicles Test Procedure (WLTP), it failed to notify a firm date or conversion factor for moving actual compliance to WLTP. Automakers are thus required to report on two cycles. They might be held accountable only to the weaker one.
To strengthen the regulatory incentive for clean vehicles, standards often rely on volume derogation factors—commonly known as super-credits—which allow automakers to multiply the sales count of low-emission models when calculating overall fleet compliance.
On one front, the July 2026 draft took a step forward by modestly trimming paper allowances for established, commercialised technologies. Credits for strong hybrids were reduced from 2.0 to 1.6, while flex-fuel vehicle credits were cut from 1.5 to 1.1. Similarly, the new draft eliminated the controversial “small-car relaxation”—an arbitrary carve-out from the September 2025 draft that had handed compact petrol vehicles under 909 kg a free 9 gCO₂/km discount without demanding any actual technological upgrades.
Yet, the broader framework leaves substantial loopholes unaddressed. Super-credits for zero- and near-zero-emission vehicles were left untouched, retaining high static multipliers across the entire 2027–32 cycle—3.0 for battery electric and range-extended electric vehicles, and 2.5 for plug-in hybrids. While major global markets like Europe and China progressively phase down super-credits as technology matures and battery costs fall, India’s static multipliers allow automakers to meet targets through paper arithmetic rather than scaling up real EV sales on the road.
Compounding these loopholes, the July 2026 draft further expanded off-cycle technology credits to cover routine, mainstream features like tire-pressure monitoring, LED lighting, advanced glazing, and high-efficiency air conditioning up to a generous cap of 9.0 gCO₂/km. Because many of these features are already standard equipment or have their energy gains partially captured during standard laboratory tests, handing out flat deductions creates a serious risk of double-counting. By rewarding automakers with substantial paper discounts for basic engineering alongside super-credits, the draft regulation ultimately risks diluting real-world zero-emission progress by allowing automakers to meet strict climate standards through routine features rather than genuine fleet electrification
By keeping Carbon Neutrality Factors (CNF) completely intact between the September 2025 and July 2026 drafts, regulators preserved one of the single largest paper loopholes in the standard. These factors grant sweeping tailpipe discounts—8 per cent for E20–E30 petrol, 22.3 per cent for flex-fuel ethanol vehicles, and 5 per cent for compressed natural gas—under the optimistic assumption that upstream biofuels offset driving emissions. However, handing a massive 22.3 per cent discount to flex-fuel cars ignores real-world behaviour, assuming drivers always fill up with high-blend ethanol even when the fuel is unavailable and standard petrol is used instead. Crucially, because these biofuel discounts stack directly on top of static volume super-credits, they compound the loophole. By rewarding legacy combustion engines with generous allowances for alternative fuels, CNFs undermine the incentive to invest in zero-emission technologies, allowing traditional petrol and gas vehicles to pass strict climate targets.
While the July 2026 draft took a step forward by introducing a formal market-based trading system—complete with compliance passbooks, multi-year carry-forwards, and peer-to-peer credit pooling to reward progressive automakers—its potential is undermined by a state-run buyout option.
Under Clause 4(12), non-compliant manufacturers can bypass buying real credits from clean-tech leaders or paying strict legal fines, opting instead to purchase paper credits directly from the Bureau of Energy Efficiency (BEE) at fixed rates between Rs 2,500 and Rs 4,500 per gCO₂/km. This administrative shortcut creates massive regulatory distortions by cutting statutory non-compliance penalty in half compared to the Rs 5,000 per gCO₂/km penalty under the Energy Conservation Act, effectively turning a strict legal fine into a discounted fee.
By manufacturing an endless supply of government paper credits, BEE acts as an artificial market actor that caps financial returns for forward-looking EV innovators. Worse still, 90 per cent of buyout revenues are funnelled to state governments based on regional car sales rather than recycled back into automotive R&D or charging infrastructure, bypassing clean-tech engineering entirely. Without a dynamic floor price scaled to the severity of missed targets, this mechanism gives laggard automakers a predictable shortcut to treat non-compliance as a routine business expense rather than upgrading their vehicle fleets.
It’s clear that combining these accounting flexibilities—flattened target slopes, static super-credits, unverified carbon neutrality discounts, expanded off-cycle credits, and a state-run buyout—weakens the impact of the CAFE-III standards. Estimates by the International Council on Clean Transportation indicate that while targets aim for a 31 per cent fleet emissions reduction, actual real-world cuts drop to just 13.8 per cent by FY2031-32. Automakers can achieve full compliance with an electric vehicle sales share of only 8 per cent by 2031-32. This falls far short of the minimum national targets of 30 per cent EV sales by 2030 and lags behind even the ambitious state-level frameworks like the Delhi Electric Vehicle Policy.
However, there is a clear opportunity to reverse this trend before the regulations are finalised. By amending the July 2026 draft to eliminate these loopholes, policymakers can transform CAFE-III from a passive accounting exercise into a robust regulatory driver to accelerate technological innovation, enhance national energy security, improve air quality, and drive India's transition to zero-emission mobility.