CAFE 3 norms: Govt softens fuel efficiency targets in new draft policy after industry pushback

New Delhi: The Centre has eased fuel efficiency targets for carmakers in its latest draft of the corporate average fuel efficiency (CAFE) III norms released on Thursday, following pushback from the industry on the steep targets outlined in the previous draft released last September.

The new draft, which has been released for public consultation for 21 days, relaxes overall fleet fuel efficiency targets by 7-10%, making compliance relatively easier for manufacturers with larger, less fuel-efficient models.

It also introduces a system for carmakers to buy credits from the government to help meet their targets, and removes benefits for small cars that were mentioned in the previous draft.

“CAFE 2027 introduces year-on-year clearly defined targets for a five-year horizon. This methodology will provide motivation for continuous technology adoption and product planning across the compliance period. CAFE 2027 also strengthens recognition of renewable fuels’ contribution to lifecycle carbon reduction,” the draft said.

Primary among the changes was a tweak in the ‘supercredit’ style of incentives for clean vehicles.

Supercredits—accounting multipliers that allow cleaner vehicles to count as more than one vehicle for compliance purposes—were cut down to 1.1 for flex-fuel vehicles from 1.5 in the previous draft. Flex-fuel vehicles can run on any mix of petrol and ethanol. Supercredits for strong hybrid cars were also reduced to 1.6 from 2.

Supercredits for other vehicle categories remain unchanged, including for electric vehicles at 3, meaning every electric car would be counted as three cars.

Similar counting exercises will be done for other cleaner vehicles, including strong hybrids, plug-in hybrids, range-extended electric vehicles, strong hybrid flex-fuel vehicles, and flex-fuel vehicles, proportionate to their respective supercredits proposed in the policy.

Credits for sale

The new draft on Thursday also introduced a credit-debit system, which, in a global first, allows carmakers to purchase credits from the regulator Bureau of Energy Efficiency (BEE) under the Union power ministry, if they fail to meet fuel efficiency targets. Mint first reported in April about BEE proposing such a system to India’s carmakers.

This is a bank passbook-like system in which companies that meet targets earn credits, while those that fall short accumulate debits that attract penalties. “CAFE 2027 provides ease of doing business by introducing flexible compliance mechanisms,” the new draft said.

To be clear, carmakers are allowed to purchase credits from peers and competitors to meet fuel efficiency targets in other countries also, but the proposal to purchase credits from the regulator itself is unprecedented.

Every automaker will have a passbook for each of the fiscal years from 2028 to 2032. A positive credit balance would indicate that the company's average annual fuel efficiency numbers are below the maximum cap. A positive debit balance, in contrast, would indicate that the company's average annual fuel efficiency exceeds the cap set for it.

While the passbook will be maintained annually, penalties will be imposed at the end of two block periods, spanning three years (2027-28 to 2029-30) and two years (2030-31 to 2031-32), respectively.

At the end of each block period, the regulator will calculate penalties based on the debits in each automaker’s passbook. Automakers can use credits in their passbook, as well as those purchased from the government, to offset these debits.

“The regulator has tried to play a balanced role in offering a flexible compliance pathway as well as trying to ensure ease of doing business by not setting too stringent of targets,” said Sharif Qamar, associate director in the Transport and Urban Governance Division of TERI, a think tank.

“However, these norms will take EVs to around 14-15% penetration, which means that the regulator-driven boost will be lagging behind the market growth rate we are currently witnessing,” he added.

Electric cars grew 84% in FY26 to nearly 200,000 units as per Federation of Automobile Dealers Association.

The background

CAFE norms were first notified in 2015, and went into effect in 2017. The first iteration lasted five years until 2022, followed by the second, which has been in effect since.

The third iteration, which is currently being finalized, is scheduled to come into force from 1 April 2027 and will remain in play till 31 March 2032.

The first draft of the CAFE-III norms was floated in June 2024, followed by a second draft in September 2025, even as automakers remained divided over whether regulators should ease targets for smaller, lighter cars.