CAFE-III norms propose tighter fuel-efficiency targets; EVs, hybrids, flex-fuel vehicles get major compliance edge

The Ministry of Power on Wednesday released the draft Corporate Average Fuel Economy (CAFE) 2027 regulations, proposing a sharper tightening of fuel-efficiency norms for passenger vehicles from April 1, 2027, while introducing a technology-neutral compliance framework that rewards electric vehicles, hybrids, flex-fuel and CNG-powered vehicles.

The proposed CAFE-III norms will remain in force until FY32 and require automakers to progressively improve the average fuel efficiency of their passenger vehicle fleets each year. Besides stricter targets, the draft also introduces a market-based compliance mechanism under which manufacturers can trade fuel-efficiency credits or purchase them from the Bureau of Energy Efficiency (BEE) if they fall short of prescribed targets.

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The proposal is a significant evolution of India's fuel-efficiency regulations as it brings renewable fuels, advanced automotive technologies and electrified powertrains under a single compliance framework. The government has invited public comments on the draft before notifying the final regulations.

Stricter targets till FY32

Under the draft notification, manufacturers will continue to receive weight-based fuel consumption targets. However, the allowable fleet-average fuel consumption will become progressively more stringent every year from FY28 to FY32 by reducing the applicable constants used to calculate manufacturer-specific targets.

The regulations continue to apply to M1 category passenger vehicles sold in India.

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EVs, hybrids receive super credits

One of the biggest changes proposed is the introduction of enhanced "volume derogation factors" commonly referred to as super credits for cleaner vehicle technologies.

Battery electric vehicles (BEVs) and range-extended electric vehicles (REEVs) will receive a multiplier of 3.0, meaning each vehicle will count as three vehicles for compliance calculations. Plug-in hybrids and flex-fuel strong hybrids receive a factor of 2.5, strong hybrids 1.6, while flex-fuel ethanol vehicles receive 1.1. These incentives improve a manufacturer's fleet-average fuel consumption performance and make compliance easier.

Ethanol, CNG and biofuels get carbon-neutrality benefits

For the first time, the CAFE framework formally recognises renewable fuels through Carbon Neutrality Factors (CNFs).

The draft proposes an 8% reduction in declared tailpipe CO₂ emissions for E20-compatible vehicles, including strong hybrids and plug-in hybrids. Flex-fuel ethanol vehicles and flex-fuel strong hybrids receive a larger 22.3% carbon neutrality benefit.

Similarly, CNG vehicles will receive a 5% carbon neutrality benefit, or a higher value linked to the government's notified compressed biogas (CBG) blending percentage. Diesel vehicles will receive corresponding benefits based on notified biofuel blending levels.

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Credit trading introduced

The draft also creates a new compliance market.

Manufacturers exceeding their prescribed targets will generate compliance credits, while those missing targets can offset deficits by carrying forward credits within a compliance block, purchasing credits from other manufacturers, pooling compliance with another automaker or buying credits directly from BEE.

The draft proposes BEE credit buyout prices beginning at ₹2,500 per gram of CO₂/km in FY28, rising annually to ₹4,500 by FY32.

Technology incentives expanded

Besides electrification, the government is also encouraging deployment of fuel-saving technologies.

Manufacturers can claim compliance benefits—up to an overall cap equivalent to 9 g CO₂/km—for deploying technologies such as automatic start-stop systems, tyre pressure monitoring systems, regenerative braking, six-speed or higher transmissions, efficient alternators, LED lighting, advanced glazing, efficient air-conditioning systems and solar-reflective paint, among others.

Shift towards WLTP

The draft also signals India's gradual migration towards globally harmonised testing procedures.

From April 1, 2026, manufacturers will be required to report vehicle performance under both the existing Modified Indian Driving Cycle (MIDC) and the Worldwide Harmonised Light Vehicles Test Procedure (WLTP). The conversion methodology for future WLTP-based CAFE compliance will be notified separately after analysing the reported data.

Small manufacturers exempt

The proposed regulations exempt manufacturers selling fewer than 1,000 passenger vehicles annually from fleet-average compliance obligations. Penalties for non-compliance will be imposed at the end of each compliance block after adjusting eligible credits