Power Ministry proposes credit trading system under CAFE fuel efficiency norms

The Ministry of Power (MoP) has released two draft notifications proposing major changes to India’s Corporate Average Fuel Efficiency (CAFE) framework for M1 category passenger vehicles. The proposals introduce a credit trading mechanism for the current compliance regime and lay down stricter fuel efficiency requirements for the period beginning April 1, 2027.

The draft notifications are part of the government’s effort to update the CAFE framework in line with the growing adoption of electric vehicles, alternative fuels and fuel-saving technologies.

Credit trading framework

The first draft notification proposes amendments to the existing CAFE regulations applicable for FY 2022-23 to FY 2026-27.

Under the proposal, vehicle manufacturers would be allowed to trade surplus compliance credits among themselves or purchase credits from the Bureau of Energy Efficiency (BEE) at a prescribed rate. The framework envisages a five-year compliance block covering FY23 to FY27.

A “passbook” mechanism has been proposed to maintain records of credits and debits for each manufacturer. Surplus credits may be transferred through mutual agreements, while any credits remaining unutilised at the end of the compliance period will lapse.

The draft fixes the credit buyout price at Rs 2,500 per gram of CO₂ per kilometre. Compliance assessments will continue to be undertaken annually, although penalties will be determined only after completion of the five-year block.

The Ministry has proposed that revenues generated through penalties and credit purchases be credited to the Central Energy Conservation Fund, with 90% subsequently distributed among states based on their share in vehicle sales.

Comments and objections on the draft amendments have been invited within 14 days of publication in the Gazette of India.

CAFE 2027 framework

The second notification introduces a new regulatory regime, termed “CAFE 2027”, covering FY 2027-28 to FY 2031-32.

The proposed framework establishes progressively tighter fuel consumption standards based on a manufacturer’s sales-weighted average unladen vehicle mass.

According to the draft, the constant multiplier used in the annual fuel consumption formula will decline from 0.00158 in FY28 to 0.00131 in FY32, resulting in increasingly stringent compliance requirements over the five-year period.

The framework divides compliance into two blocks—a three-year period from FY28 to FY30 and a two-year period from FY31 to FY32. Credits generated during a block may be transferred within that period but will expire at the end of the respective compliance block.

Manufacturers that fall short of targets may purchase credits from BEE, with prices rising from Rs 2,500 per g CO₂/km in FY28 to Rs 4,500 per g CO₂/km by FY32.

Compliance incentives

The draft introduces several mechanisms intended to account for cleaner fuels and advanced vehicle technologies.

Manufacturers using renewable fuels would be eligible for Carbon Neutrality Factors, including an 8% reduction in declared tailpipe emissions for vehicles operating on E20 or higher ethanol blends, a 22.3% reduction for flex-fuel ethanol and strong hybrid flex-fuel vehicles, and a 5% reduction for compressed natural gas (CNG) vehicles, subject to compressed biogas blending levels.

The proposal also allows manufacturers to claim technology-based derogations of up to 9 g CO₂/km. Eligible technologies include start-stop systems, regenerative braking, tyre pressure monitoring systems, LED lighting and efficient alternators, with each technology qualifying for a benefit of 1 g CO₂/km.

In addition, the framework introduces “super credits” to encourage adoption of low-emission vehicle technologies. Battery electric vehicles and range-extended electric vehicles would receive a factor of 3.0, plug-in hybrids and strong hybrid flex-fuel vehicles 2.5, strong hybrids 1.6, and flex-fuel ethanol vehicles 1.1.

Testing requirements

The proposed regulations mandate reporting under both the Modified Indian Driving Cycle (MIDC) and the Worldwide Harmonized Light Vehicles Test Procedure (WLTP) from April 2026. Conversion factors between the two testing methodologies will be notified separately.

Manufacturers with annual sales of fewer than 1,000 vehicles will remain exempt from fleet-average compliance obligations.

Regulatory background

India’s CAFE framework was first notified in April 2015 and subsequently amended in December 2021.

According to the explanatory memorandum accompanying the draft notifications, the automobile industry has consistently exceeded prescribed targets, outperforming them by 10% during the first compliance cycle and by 9% during the second.

The Ministry stated that the proposed amendments reflect changes in vehicle technologies, fuel options and market conditions since the original regulations were introduced.

Stakeholders have been invited to submit comments on the CAFE 2027 framework within 21 days of publication of the draft notification on the websites of the Ministry of Power and BEE.

The featured photograph is for representation only.