In a global first, the Centre may introduce an option to buy credits directly from the regulator under the third iteration of corporate average fuel efficiency norms, offering automakers a financial remedy against penalties for failing to meet stricter targets.
The move follows automakers' repeated claims that India's fuel-efficiency norms are among the strictest globally and could threaten the viability of the auto sector.
The draft proposal, reviewed by Mint, introduces a bank passbook-like system in which companies that meet targets earn credits, while those that fall short accumulate debits that attract penalties.
Automakers with debits will be allowed to purchase credits from the Bureau of Energy Efficiency (BEE) at fixed rates set annually from 2028 to 2032, ranging from ₹2,500 to ₹4,500 per gramme of CO₂/km.
While automakers will be allowed to trade credits among themselves, as is the global norm, the option to purchase credits directly from a regulator is unprecedented.
“California allows fully transparent credit trading among OEMs (original equipment manufacturers), while Europe permits pooling among manufacturers,” said Amit Bhatt, India managing director at International Council on Clean Transportation, a non-profit organization that advises regulators on environmental issues.
“In contrast, BEE’s proposal represents a distinct Indian approach by introducing a regulated credit purchase mechanism, effectively creating a financial compliance pathway that is not available in either benchmark jurisdiction,” he added.
Queries sent to the BEE, Maruti Suzuki, Tata Motors Passenger Vehicles, Mahindra and Mahindra, and Hyundai Motor India remained unanswered.
An easier way out?
To put it simply, 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 emissions are below the maximum cap. A positive debit balance, in contrast, would indicate that the company's average annual fuel emissions exceed 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.
Experts said a key point to note in the system would be whether the purchase of credits becomes a cheaper pathway for automakers to comply with the norms.
“Whether this serves as a pragmatic feature for a developing market or creates a structural weakness will depend on how the BEE's credit price will compare to the cost of actual efficiency improvements,” Bhatt said.
Some experts are of the view that while some provisions on the penalty mechanism provided much-needed clarity, other provisions raised more questions.
"The proposed framework requires a detailed cost-benefit analysis, along with greater clarity on how the mechanism aligns with the relevant provisions of the Energy Conservation Act. Questions remain regarding its effectiveness, potential compliance burden, and overall impact on regulated entities," said Sharif Qamar, associate director of transport and urban governance at think tank The Energy and Resources Institute (Teri).
Qamar added that an annual compliance cycle would enable closer monitoring, quicker course correction, and stronger alignment with existing reporting and regulatory systems, rather than penalty collections at the end of two block periods.
Cause for further delay?
CAFE norms were first notified in 2015, which went into effect in 2017. The first iteration lasted five years until 2022, followed by the second, which has been in effect ever since. The third iteration, which is currently being finalized, is scheduled to come into force from 1 April 2027 and will remain in force 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.
While Maruti Suzuki has argued for special relaxations for small cars, other automakers such as Tata Motors, Mahindra and Mahindra, and Hyundai have opposed any relaxations.
In the latest draft, dated 8 April and circulated to the industry last week, targets for small cars have been eased compared to the previous draft, while heavier cars face stricter emissions targets.
With less than 12 months remaining, automakers have urged the government to finalize norms quickly so that they can plan in time.