Fueling the Future: Everything You Need to Know About India’s Draft CAFE-III Rules

 Fueling the Future: Everything You Need to Know About India’s Draft CAFE-III Rules

The Union Ministry of Power released the third draft of the Corporate Average Fuel Efficiency (CAFE)-III norms for passenger vehicles. Slated to take effect from April 1, 2027, for a five-year period (running up to 2031-32), the new policy maps out a structured path to curb vehicular emissions in India.

The latest draft shows that the government has largely retained the middle-ground framework established in April 2026, balancing the needs of small-car manufacturers and large SUV makers after intense industry pushback on an aggressive initial proposal from late 2025.

1. First-Ever Carbon Neutrality Factors (CNF) for Biofuels

For the very first time in India’s CAFE history, the government is officially recognizing the lower lifecycle carbon footprint of renewable fuels.

• The Benefit: Automakers can deduct a specific percentage of their declared tailpipe $\text{CO}_2$ emissions before their final compliance is assessed.

• The Numbers: Vehicles using the national standard E20 (20% ethanol-blended petrol) get a 8% carbon reduction factor. This reduction increases up to 22.3% for strong hybrids and flex-fuel vehicles. Reductions for Compressed Biogas (CBG) and other biofuels will scale dynamically based on actual prevailing blending levels.

2. Progressively Tightening Targets (With a Eased Slope)

Automakers are required to systematically improve the fuel efficiency of the entire fleet they sell.

• Target Trajectory: Fleet-average fuel consumption targets will tighten from 3.996 liters/100 km ($94.76 \text{ gCO}_2\text{/km}$) in FY28 to 3.327 liters/100 km ($78.90 \text{ gCO}_2\text{/km}$) by FY32.

• The Compromise: The overall fleet-wide emission targets are actually around 21% relaxed compared to the original September 2025 draft. The weight-adjustment curve (the emission slope) has been made flatter. This takes away the unfair compliance advantage massive SUVs used to enjoy while simultaneously easing targets for lighter cars—moving the regulatory focus to overall fleet cleaner emissions.

3. Shift from Annual to Block Assessment

Instead of penalizing or rewarding automakers on a strict year-to-year basis, compliance will now be calculated over two separate blocks:

• Block 1: A three-year initial period (FY28 to FY30).

• Block 2: A two-year final period (FY31 to FY32).

  This block structure gives manufacturers a layer of stability and regulatory flexibility to manage vehicle development timelines without constant penalties.

4. Credit Trading, "Super Credits," and Buy-Out Options

To encourage green technology while maintaining realistic industry pathways, the draft outlines a market-based compliance framework:

• Super Credits: The draft provides major compliance weightage ("super credits") to incentivize zero-and-low emission vehicles. Battery Electric Vehicles (BEVs) and Range Extenders receive the maximum weightage of 3, while strong hybrids sit at 1.6, and flex-fuel strong hybrids get 2.5.

• Incentives for Tech: Manufacturers can claim up to $9 \text{ gCO}_2\text{/km}$ in compliance benefits by implementing approved fuel-saving technologies (capped at $1 \text{ gCO}_2\text{/km}$ per technology).

• Credit Purchases: Companies that outperform their targets earn compliance credits. Those falling short can carry forward obligations, pool resources with other OEMs, or buy compliance credits directly from the Bureau of Energy Efficiency (BEE). The buyout price is set to start at ₹2,500 per unit ($1 \text{ gCO}_2\text{/km}$) in FY28, escalating by ₹500 every year up to ₹4,500 by FY32.

Exemption: Small-volume manufacturers with annual sales of fewer than 1,000 passenger vehicles in India will continue to remain fully exempt from these CAFE-III regulations.

Public and industry stakeholders have been given a 21-day window to submit feedback and suggestions on this draft framework, with the deadline set for August 6, 2026