The Ministry of Power has circulated the Draft Corporate Average Fuel Economy 2027 Norms (CAFE-III) for stakeholder consultation, marking the next phase of India’s fuel-efficiency standards for four-wheeled motor passenger vehicles. Proposed to take effect from April 1, 2027, after the current CAFE-II regime expires on March 31, 2027. The new framework would remain in force for a period of five years, from 2027–28 to 2031–32. The draft norms are applicable to M1 category motor vehicles (passenger cars having not more than eight seats in addition to the driver’s seat and a gross vehicle weight not exceeding 3,500 kg) that are manufactured or imported for sale in India during this period.
The Ministry of Power and the Bureau of Energy Efficiency (BEE) have invited suggestions and feedback from stakeholders and the public until August 6, 2026. The latest draft has been released after months of negotiations between manufacturers of small and large SUVs and broadly retains the compromise reached over the compliance formula, including provisions relating to carbon-neutrality factors and low-emission vehicles.
Evolution and Objectives of CAFE Norms
The CAFE norms set fuel efficiency targets that every passenger vehicle manufacturer must meet across the vehicles it sells in a financial year. Rather than prescribing a target for every model, the framework calculates the average fuel consumption of all the passenger vehicles sold by a manufacturer. Compliance is measured using carbon dioxide emissions, which directly correspond to the amount of fuel consumed by a vehicle.
India introduced the first phase of CAFE norms in 2017–18 after they were first notified in 2015. The second phase came into effect in 2022-23 with tighter limits. The objective of CAFE-III remains unchanged from the earlier phases: to reduce the amount of fuel consumed by the country’s passenger vehicle fleet. Lower fuel consumption reduces carbon emissions, help lower crude oil imports and contributes to improving urban air quality and lowering fuel costs over a vehicle’s lifetime. Since the transport sector is among the country’s largest consumers of petroleum products, fuel efficiency forms an important part of India’s energy security strategy.
Unlike Bharat Stage (BS) norms, which aim to control pollutants such as nitrogen oxides and particulate matter from individual vehicles, CAFE focuses on the average fuel efficiency of an automaker’s entire passenger vehicle portfolio. Manufacturers are therefore free to decide how to achieve compliance through better engines, lighter vehicles, hybrids, alternative fuels, or electric vehicles.
Proposed Fuel Efficiency Targets
The draft proposes progressively tighter fleet-average fuel consumption targets over the five-year compliance period. The benchmark has been proposed at 3.996 litres per 100 kilometres, equivalent to 94.76 grams of carbon dioxide per kilometre, for 2027–28. It would be progressively tightened to 3.327 litres per 100 kilometres, or 78.90 grams of carbon dioxide per kilometre, by 2031–32. The proposal is estimated to tighten fleet-average carbon dioxide emission targets by 16–21 per cent over CAFE-II in the first year, with the reduction reaching 30–34 per cent by 2031–32. The Energy and Resources Institute (TERI) estimates that the corresponding corporate average carbon dioxide emissions at the reference weight tighten from 94.76 gCO2/km in 2027–28 to 76.77 gCO2/km by 2031–32 before applying Carbon-Neutrality Factor (CNF). Investment Information and Credit Rating Agency (ICRA) have similarly estimated that the target would begin at 94.8 gCO2/km in 2027–28 and tighten steadily to 78.9 gCO2/km by 2031–32.
The latest draft relaxes overall fleet-wide emission targets compared with the original September 2025 proposal. Industry experts have observed that the revised draft adopts a more balanced approach, while making compliance relatively easier for manufacturers with larger and less fuel-efficient models.
Compliance Framework and Assessment Mechanism
CAFE-III introduces a five-year compliance period covering 2027–28 to 2031–32. Compliance would be assessed over two blocks: an initial three-year period from 2027–28 to 2029–30, followed by a two-year period from 2030–31 to 2031–32. While penalties would continue to be calculated at the end of each compliance block, manufacturers’ performance would be assessed and reported annually.
The proposed framework moves away from purely penalty-based approach and offers manufacturers multiple compliance options. Manufacturers exceeding their prescribed targets would earn compliance credits, while those who fall short would accumulate debits. These debits would be recorded in a digital compliance account, or passbook, and maintained for every manufacturer.
Manufacturers with surplus credits may retain them for future compliance periods or exchange them with other manufacturers through voluntary pooling arrangements. Companies facing compliance deficits may purchase credits from the BEE. The proposal sets an initial buyout price of Rs 2,500 for 2027–28 for each compliance credit, with the amount increasing by Rs 500 annually to reach Rs 4,500 by 2031–32. Credits left unused at the end of a compliance block would lapse.
Manufacturers who fail to comply with the norms would be liable to penalties under the Energy Conservation Act (2001), while passenger vehicle makers with annual sales of less than 1,000 units would remain exempt.
Weight-Based Formula and Stringency
The CAFE framework uses a weight-based formula to determine the annual fuel-consumption targets. The calculation is expressed as:
Annual Average Fuel Consumption Standard (litre per 100 kilometre) = a × (W – b) + c
In this equation, ‘a’ represents the slope or constant multiplier, ‘W’ is the weighted average unladen mass of all passenger vehicles sold by a manufacturer, ‘b’ is the industry’s reference average vehicle weight, and ‘c’ is a constant that changes every year.
The revised draft lowers the slope value from 0.002 under CAFE-II to 0.00158 in 2027–28 under CAFE-III, further to 0.00131 by 2031–32. Simultaneously, the industry’s average weight is projected to increase from 1,082 kilograms under CAFE-II to 1,229 kilograms under CAFE-III. These changes would flatten the weight-adjustment curve, reducing the compliance advantage for heavier SUVs while easing the targets for lighter vehicles.
According to TERI, the target line would become flatter, reducing the advantage that heavier vehicles previously enjoyed under the weight-based formula while increasing the compliance pressure on companies with heavier fleets.
Carbon Neutrality Factors and Super Credits
One of the defining features of the draft CAFE-III framework is the introduction of carbon-neutrality factor (CNF). For the first time in the history of CAFE norms, manufacturers are permitted specified reductions in declared tailpipe carbon dioxide emissions for vehicles using ethanol, biofuels, and Compressed Bio-Gas.
An eight per cent CNF has been proposed for current ethanol blending levels (E20 to E30). Strong hybrids and Flex Fuel Ethanol vehicles would receive a 22.3 per cent benefit. CNG vehicles would receive a five per cent CNF or the prevailing Compressed Bio-Gas blending percentage as notified by the government, whichever is higher, while diesel vehicles would receive benefits linked to the future biodiesel blending levels.
The draft also retains super credits for cleaner vehicle technologies. Battery electric vehicles and range-extended hybrid electric vehicles would receive a multiplier of 3.0. Plug-in hybrids and strong hybrid flex-fuel ethanol would receive a multiplier of 2.5, while strong hybrid electric vehicles would receive a multiplier of 2.0; flex-fuel ethanol vehicles would receive a multiplier of 1.5.
Together, CNF and super credit seek to promote battery electric vehicles, hybrids, ethanol-based fuels, flex-fuel vehicles, CNG, and other low-carbon options rather than mandating a single technology pathway.
Fuel-Saving Technologies and Testing Procedures
The draft places considerable emphasis on fuel-saving technologies. Manufacturers may claim compliance benefits of up to 9 gCO2 /km, subject to a cap of 1 gCO2 /km per technology for approved fuel-saving technologies.
These include automatic start-stop systems, regenerative braking, tyre-pressure monitoring systems, six-speed or higher transmissions, efficient alternators, motor-generators used in mild hybrids, LED lighting, advanced glazing, electric water pumps, high-efficiency air-conditioning systems, solar-reflective paints, and pulse-width-modulated radiator fans.
The draft also adds detailed technical criteria, prescribing minimum performance requirements for several technologies, including regenerative braking systems, alternators, LED lighting, and tyre-pressure monitoring systems (TPMS).
Another important feature is the transition from the Modified Indian Driving Cycle (MIDC) to the Worldwide Harmonised Light Vehicles Test Procedure (WLTP). Manufacturers would be required to submit fuel-efficiency data under both MIDC and WLTP, while the government would notify a conversion factor between the two test cycles separately. The dual-reporting requirement is intended to facilitate the gradual transition to international testing practices and collect real-world data.
Implications and the Way Forward
The draft CAFE-III norms came at a time when India’s passenger vehicle market is witnessing a growing share of SUVs, increasing acceptance of hybrid technology, expansion of flex-fuel programmes, and continued growth of electric vehicles. The proposal indicates that the government seeks tighter fuel-efficiency standards while preserving flexibility in technology choices.
The ICRA estimates that improved fuel efficiency standards could generate cumulative fuel savings worth around Rs 38,000 crore during the CAFE-III period. This highlights the potential economic benefits of lower fuel consumption alongside reduced emissions.
The draft CAFE-III norms represent the next stage in India’s fuel efficiency framework. By introducing progressively tighter fuel-consumption targets, CNF, super credits, a market-based compliance mechanism, and a gradual transition to global testing procedures, the proposal seeks to reduce fuel consumption and carbon emissions while lowering the dependence on imported crude oil. As the stakeholder consultation process continues, the broad direction of policy reflects a shift towards tighter standards combined with greater flexibility, enabling manufacturers to adopt multiple pathways for improving fleet fuel efficiency. Going forward, effective implementation of CAFE-III would require a predictable regulatory roadmap, technology-neutral incentives and other measures ensuring that the transition from conventional fuel-based to alternative-fuel-based vehicles would not disproportionately raise the costs of most affordable, small passenger cars.
© Spectrum Books Pvt Ltd.
