The government is weighing a proposal to reward carmakers that have topped India's fuel-efficiency requirements since financial year 2023 by allowing them to sell surplus compliance credits to peers that have missed their targets. If implemented, the proposal would create a new revenue opportunity for companies such as Tata Motors Passenger Vehicles and Maruti Suzuki, who have met their targets over the past few years.
A draft notification by the power ministry dated 19 May, shared with industry stakeholders and reviewed by Mint, proposes a 'credit-debit passbook system', under which manufacturers that exceeded their Corporate Average Fuel Efficiency (CAFE) Phase II targets between FY23 and FY27 can sell their surplus compliance credits to their lagging peers.
The proposed credits trade framework mirrors emission-credit markets in Europe, the US and China, where automakers routinely trade compliance credits.
Between 2017 and 2025, Tesla reportedly earned more than $10 billion by selling regulatory emission credits to legacy automakers that struggled to meet increasingly stringent emission standards.
Queries emailed to top automakers, including Tata Motors PV, Maruti, Hyundai Motor India and Mahindra & Mahindra, remained unanswered until press time.
How it works
Simply put, an automaker would maintain a compliance passbook for each financial year under the CAFE 2 regime if the proposal is notified. A positive credit balance would indicate that a company's average fleet emissions are below the regulator's prescribed limit, while a debit balance would mean emissions exceeded the threshold.
Credits cancel out debits, and automakers must maintain a net positive balance to avoid penalties. Flouting of the fuel efficiency norms can attract a penalty of ₹25,000-50,000 per non-compliant vehicle sold in addition to a base penalty of ₹10 lakh.
If implemented, the government will change its rules of how it plans to calculate penalties from FY23 onwards, as the original notification for CAFE 2 did not incorporate the credit system. The credit trading plan and the CAFE 3 norms are both in the draft stage.
Top performers
Regulatory disclosures and management commentary suggest Tata Motors PV and Maruti Suzuki have consistently exceeded their targets, potentially leaving them with a sizeable pool of tradable credits that can be traded with other carmakers for a pre-determined price.
According to Tata Motors PV investor presentations, the company beat its CAFE targets by 10% in FY23, 20% in FY24, 20% in FY25, and 25% in FY26.
Maruti, on the other hand, outperformed the CAFE 2 targets by 2% in FY23, 5% in FY24 and 8% in FY25, as per its last annual report. While the management has maintained in its commentary that it remains compliant with CAFE 2, its data for financial year 2026 is not available yet.
The catch
The proposal also allows laggard automakers to purchase credits directly from the Bureau of Energy Efficiency (BEE) at ₹2,500 per CO₂ g/km, meaning carmakers looking to sell these credits have a price ceiling to keep in mind before setting their offerings.
That said, carmakers may not necessarily turn to rivals for credits, as the proposal also allows them to buy credits directly from the regulator, BEE.
Besides, compliance with the CAFE 2 norms will be assessed over the entire FY23-FY27 period. Carmakers that outperform their targets in some years can offset shortfalls in others, reducing or even eliminating the need to buy credits.
The option to buy directly from a regulator is currently not available in any global market.
Compliance picture
Automakers, including Mahindra & Mahindra and Hyundai Motor India, have missed their targets in at least one financial year, although neither company has disclosed the annual fuel efficiency performance.
Mint had reported in October 2024 that eight manufacturers—including Mahindra, Hyundai, Skoda, Volkswagen, Renault, Honda and Kia—had missed their FY23 emission targets.
While their subsequent compliance status remains unclear, Mahindra and Hyundai have recently said their fleet emissions remain within legal limits without providing detailed performance data.
No penalties have been recovered from automakers so far, with the latest proposal set to fundamentally change how compliance and penalties are calculated.
Why CAFE matters
To comply with CAFE norms, manufacturers must progressively improve their fleet fuel efficiency by increasing sales of cleaner vehicles such as electric, compressed natural gas (CNG) and hybrid models.
India had introduced CAFE norms in 2015, with the first phase coming into effect from FY18, the CAFE 2 span is FY23-FY27, while CAFE 3, from FY28 to FY32, is likely to take off on 1 April 2027, though a final notification is awaited.
Experts said stringent compliance standards will form the bedrock of proposals such as crediting trading.
"Credit trading provides flexibility and rewards early movers in the efficiency space under regulations like CAFE. But these incentives deliver meaningful benefits only when they are backed by sufficiently stringent regulatory targets. Strong standards remain the foundation of an effective compliance system," said Amit Bhatt, the India managing director at International Council on Clean Transportation.
Some experts argue that allowing the regulator itself to sell credits could reduce the attractiveness of the market.
"If the price of credits sold by BEE remains the same for CAFE 2 period (2022-27), and the same price is used for some part of CAFE 3, that effectively means the value of each credit is being deflated over multiple years," said Shyamasis Das, who leads the electric mobility research vertical at the New Delhi-based Centre for Social and Economic Progress. "While the option of purchasing credits from companies is there, laggards will prefer buying credits from the regulator, given the option."