The Union Power Ministry has released draft CAFE-III regulations proposing tighter fleet-average fuel efficiency targets from April 1, 2027. The guidelines introduce carbon neutrality factors, fuel-saving technology incentives, and a credit-trading system administered by the Bureau of Energy Efficiency
Published Date – 16 July 2026, 05:09 PM
New Delhi: The government has proposed tighter fuel efficiency standards for passenger vehicles under the third phase of the Corporate Average Fuel Efficiency (CAFE) regulations, including stricter carbon dioxide emission targets, incentives for cleaner technologies, and a market-based compliance mechanism.
The Union Power Ministry on Thursday released draft CAFE-III norms for stakeholder consultation, proposing the new norms to take effect from April 1, 2027, after the current CAFE-II regime expires on March 31, 2027. These will remain in force for five years.
Compliance would be assessed over two blocks — an initial three-year period followed by a two-year period.
The proposed regulations would apply to M1 category passenger vehicles having not more than eight seats in addition to the driver’s seat, that are manufactured or imported for sale in India during the 2027-28 to 2031-32 period.
The draft proposes progressively tighter fleet-average fuel consumption targets, reducing the benchmark from 3.996 litres per 100 km (94.76 grams of carbon dioxide per km) in 2027-28 to 3.3273 litres per 100 km (78.90 grams of CO2 per km) by 2031-32.
The phased approach is intended to provide automakers with greater regulatory certainty while allowing time to develop and introduce more fuel-efficient models.
For the first time, the proposal introduces Carbon Neutrality Factors (CNFs), allowing specified reductions in declared tailpipe CO2 emissions for vehicles using ethanol, biofuels and Compressed Bio-Gas (CBG).
An 8 per cent CNF has been proposed for current ethanol blending levels, while reductions for CBG and other biofuels would be linked to prevailing blending levels.
The draft also proposes compliance incentives of up to 9 grams of CO2 per km for approved fuel-saving technologies, subject to a cap of 1 gram per technology, and retains volume-based “super credits” for battery electric vehicles, range-extended electric vehicles, plug-in hybrids, strong hybrids and flex-fuel vehicles while calculating fleet-average fuel consumption.
A credit-and-debit mechanism has also been proposed under which manufacturers exceeding their prescribed targets would earn compliance credits that can be carried forward within a compliance block.
Automakers falling short of their targets could meet their obligations through carry-forward provisions, voluntary pooling arrangements with other manufacturers or by purchasing compliance credits from the Bureau of Energy Efficiency (BEE).
The proposal sets an initial buyout price of Rs 2,500 for each compliance credit, with the price rising by Rs 500 annually. Credits would lapse if left unused at the end of a compliance block.
Manufacturers failing to comply with the norms would be liable for penalties under the Energy Conservation Act, while passenger vehicle makers with annual sales of fewer than 1,000 units would remain exempt.
The Ministry of Power has invited comments from stakeholders and the public on the draft norms until August 6.
“The norms are proposed to be applicable to M1 category passenger vehicles manufactured or imported for sale in India during 2027-28 to 2031-32,” it added.
