India's new Corporate Average Fuel Economy (CAFE III) norms will apply to passenger vehicles from April 1, 2027, to March 31, 2032.
The rules offer emissions discounts and compliance credits for hybrids, ethanol-blended fuels, CNG vehicles and other technologies.
Automakers can also purchase compliance credits from the Bureau of Energy Efficiency, with prices starting at Rs 2,500 per g CO₂/km.
The author argues that these provisions could allow manufacturers to meet regulatory targets without making substantial investments in electric vehicles.
The analysis warns that weaker incentives for electrification could undermine India's domestic EV supply chains and slow the transition to zero-emission transport.
On September 29, the Union Ministry of Power formally gazetted the third phase of Corporate Average Fuel Economy (CAFÉ III) norms for passenger vehicles, which will be effective from April 1, 2027, and remain in force till March 31, 2032. On paper, the targets for fuel consumption and carbon dioxide (CO2) emissions look demanding — they require fleet-average fuel consumption to fall from 3.9960 litres/100 kilometres in financial year (FY) 2027-28, to 3.3273 litres/100 km by FY 2031-32, corresponding to a fleet-average emissions target of 78.90 g of CO2 per km.
But behind these headline numbers lies a regulatory framework weakened by exemptions, paper credits and administrative loopholes. While the notification should have provided a roadmap for accelerating India’s transition to zero-emissions electric vehicles, strengthening energy security amid an energy crisis, eliminating tailpipe emissions and reducing the carbon intensity of road transport, it creates more discounts for the intermediate internal combustion engines that run on oil and gas, locking in more emissions.
The overarching objective of fleet-wide emissions standards should have been to create a regulatory mandate for the automobile manufacturers to shift capital away from oil- and gas-based vehicles towards zero-emission powertrains. But the new CAFE notification does the opposite; it provides the automakers an easy way out.
On top of these discounts, carmakers can get extra bonus points (called super-credits) based on sales volume. Although it expands the "super credit" multiplier for battery electric vehicles (BEVs) to 3.0, intermediate technologies, including ethanol blends, compressed natural gas (CNG), flex-fuel engines, and strong hybrids, receive substantial multipliers of their own. Flex-fuel strong hybrids receive a multiplier of 2.5, standard strong hybrids receive 1.6, and flex-fuel ethanol vehicles earn 1.1.
This significantly dilutes the focus on India’s transition to electric vehicles. The norms now allow automakers to meet statutory targets on paper while making minimal investments in real-world electrification. That risks stranding investments across domestic supply chains, and turning a crucial industrial decarbonisation policy into a pay-to-pollute revenue scheme.
The rules make it even easier for automakers by giving them special “carbon neutrality” discounts. This lets them report lower emissions on paper than their cars produce in reality. Vehicles running on 20 per cent ethanol-blended petrol or higher receive an automatic 8 per cent tailpipe CO2 discount. Flex-fuel ethanol vehicles enjoy a massive 22.3 per cent emissions deduction, and CNG vehicles receive a 5 per cent discount (or higher, depending on Compressed Bio-Gas blending). Even diesel can qualify for the discount if they are blended with biofuels.
Adding to this dilution is a list of 12 off-cycle "eco-innovation" technologies—ranging from basic start-stop systems and LED lighting to thermal-reflective paint and 6-speed transmissions—that allow manufacturers to deduct up to an additional 9.0 g CO2/km from their fleet average. Many of these features are already standard equipment in modern vehicles. By stacking these off-cycle credits with carbon neutrality discounts and hybrid multipliers, legacy automakers can easily achieve compliance while continuing to produce internal combustion vehicles.
The most controversial element of the notification is the formal institution of a government credit buyout mechanism managed by the Bureau of Energy Efficiency (BEE). Automakers that fail to meet their fleet target—even after accounting for pooling, super-credits and carbon neutrality discounts — are permitted to offset their accumulated debit balance by purchasing compliance credits directly from BEE. The buyout price is fixed at Rs 2,500 per g CO2/km for FY 2027-28, stepping up gradually to Rs 4,500 by FY 2031-32.
This buyout system has several flaws. Under the Energy Conservation Act, 2001, non-compliance was meant to trigger strict enforcement penalties set at Rs 5,000 per unit metric. By offering a direct government buyout at Rs 2,500, the notification cuts the non-compliance liability in half for lagging original equipment manufacturers (OEMs). Non-compliance shifts from a legal violation into a predictable, heavily discounted cost of doing business.
In a standard cap-and-trade market, a credit represents a real, physically verified reduction in emissions achieved by an over-performing peer OEM. When the BEE sells regulatory credits out of thin air without a corresponding physical reduction in fleet emissions, the net carbon output of the vehicle fleet artificially inflates.
By capping the buyout price at Rs 2,500, the regulator sets an artificial price ceiling across the entire automotive trading market. No non-compliant automaker will purchase market-generated credits from a progressive over performing peer at a value above Rs 2,500. Progressive OEMs that invested massively in genuine zero-emission technology cannot get market rewards.
In a market mechanism, non-compliance funds flow directly from polluting non-performing automakers to performing automakers, cross-subsidising clean-tech innovation. Under this notification, 90 per cent of buyout revenues of BEE are transferred to state governments based on regional sales volumes, diverting private industrial capital into general public coffers rather than reinvesting it in automotive research and development (R&D) or charging infrastructure.
The California Air Resources Board awards Zero Emission Vehicle credits to manufacturers exclusively based on physical vehicles delivered. Regulators never generate or sell credits to underperforming automakers. Shortfalls must be resolved by buying genuine credits from over-performing peers on an open market.
The European Commission imposes strict, non-negotiable fines for every gram of CO2 exceeded. While OEMs are permitted to pool their fleets voluntarily, the EU regulatory authorities do not create or sell credits to the industry to help companies to bypass penalty and to be compliant. Fines collected are channelled into dedicated innovation funds to finance low-carbon transition infrastructure.
China mandates a strict corporate average fuel consumption and New Energy Vehicle (NEV) credit system. Automakers facing NEV deficits must purchase surplus credits directly from competitors on an open trading platform. The state acts strictly as a market administrator, never as a credit seller.
Even within India, BEE’s approach under CAFE is an anomaly. Under the Central Electricity Regulatory Commission’s (CERC) renewable purchase obligations and the Perform, Achieve and Trade (PAT) scheme for heavy industry, shortfalls must be offset through certificates anchored to physically verified energy savings. State-administered buyouts are either absent or restricted to emergency safety valves, with revenues strictly ring-fenced for clean technology development.
This approach of let all technologies thrive loses the purpose. Learn from Delhi’s experience. Driven by a quarter-century of judicial and legal mandates, Delhi achieved dramatic shift away from dirty fuels. In different time ranges between 2012 and 2026, overall diesel vehicle registrations crashed by 72 per cent, causing diesel’s share of transport energy to plunge from 55 per cent to just 15 per cent. In its place, CNG soared—peaking at 57 per cent of the city's transport energy.
Yet, despite this massive fuel transition, toxic air pollution persisted and vehicles have remained the top contributor to air pollution.
The primary purpose of fuel efficiency norms is not to create a complex paper-balancing scheme for incremental steps, but to drive technological progress, reduce oil import dependency, lower urban air pollution and make domestic industry competitive and position them at the forefront of global technological shifts.
With government-provided buyout, and by diluting targets through stacked carbon discounts for intermediate internal combustion engine technologies running on oil and gas, the new CAFE notification misses an opportunity. The regulation is only protecting the legacy status-quo technologies at the cost of new generation technologies needed for the big transition.
Developing a competitive EV ecosystem requires massive upfront capital investments in localised manufacturing, specifically for advanced chemistry battery cells, permanent magnet electric motors, power electronics, and high-power charging corridors. The Union government is also supporting localisation with production-linked incentives. That can be wasteful if regulatory levers like CAFÉ norms do not create committed demand. It is important to recognise that private capital flows only when regulatory mandates create guaranteed, non-negotiable demand.