The Government of India is set to roll out the third phase of Corporate Average Fuel Efficiency (CAFE-III) norms from April 2027, tightening emission targets for Passenger Vehicles (PVs) while building in flexibility through credit trading and technology incentives.

The proposed framework aims to reduce fleet-wide CO₂ emissions from about 113 g/km at the end of FY27 to 78.9 g/km by FY32, marking the steepest tightening cycle under the regime so far.

The draft norms, issued by the Ministry of Power, will apply to all will apply to all M1 category passenger vehicles (designed to carry up to 8 passengers plus the driver and weighing under 3,500 kg), including imports, and replace regulations notified in 2015 and 2021. Emission compliance will be assessed annually at the manufacturer level, based on fleet-wide weighted average fuel consumption linked to vehicle mass, with provisions to carry forward surpluses or deficits within defined compliance blocks.

Industry aligns, seeks early notification

The domestic auto industry has broadly endorsed the proposal following consultations with the government. Society of Indian Automobile Manufacturers (SIAM) president Shailesh Chandra described the framework as “balanced”, noting that flexibility through mechanisms such as “credit trading”, “pooling” and “technology incentives” would make the targets achievable.

“While the industry does have a wishlist, it remains broadly aligned and on the same page overall,” stated Chandra, adding that early notification of the norms would be critical to give companies adequate timeframe to prepare for the April 2027 rollout.

A senior official of a leading carmaker, , stated that provisions such as credit trading, pooling of emissions and purchase of credits are critical to managing compliance costs, while incentives for electric and hybrid vehicles align with the sector’s ongoing transition to clean mobility.

Another industry executive, who requested anonymity, stated that there is broad consensus despite differing powertrain strategies, with no formal request to defer implementation timelines.

Credit trading, pooling to ease compliance burden

A central feature of CAFE-III is the introduction of a structured credit trading system, allowing automakers to bank excess compliance or offset shortfalls through market transactions or purchases from the Bureau of Energy Efficiency (BEE). Credits will be priced progressively from ₹2,500 per gCO₂/km in FY28 to ₹4,500 by FY32.

The framework also allows pooling of compliance across manufacturers and carry-forward of credits within blocks—spanning three years initially and two years thereafter—enabling companies to smoothen their compliance trajectory. However, any surplus credits will lapse at the end of each block.

Notably, failure to meet targets could prove costly. Under the existing regime, industry-wide penalties have run into several thousand crore rupees, with per-vehicle penalties estimated at roughly ₹49,000 for non-compliance, underscoring the financial risks of falling short, as per industry pundits.

EV push, tech incentives retained

To accelerate the adoption of cleaner technologies, the norms provide “super credits” for low-emission vehicles, reinforcing the policy push towards electrification. Battery Electric Vehicles (BEVs) and range-extended EVs will carry a 3.0 multiplier, followed by plug-in hybrids at 2.5 and strong hybrids at 1.6. Flex-fuel and CNG vehicles will benefit from emission discounts linked to fuel blending.

Automakers can also claim incremental benefits for deploying efficiency technologies such as regenerative braking, start-stop systems, and high-efficiency air-conditioning, which lower reported fuel consumption.

It may be recalled that India first introduced CAFE norms in 2017, setting a fleet-average emission cap of 130 g/km, which was tightened to 113 g/km under the second phase from 2022. The proposed shift to 78.9 g/km by FY32 represents a near 40% reduction from the original benchmark, significantly raising the bar for automakers.