The Ministry of Power has officially notified the Corporate Average Fuel Economy Phase III (CAFE-III) regulations for M1 category passenger vehicles, applicable from April 1, 2027, to March 31, 2032. According to reports from NDTV Profit, the final framework mandates a steady, annual tightening of fleet-wide fuel efficiency targets and establishes a formal credit trading mechanism administered by the Bureau of Energy Efficiency (BEE). The regulations apply to vehicles carrying up to eight passengers in addition to the driver, with the Ministry of Road Transport and Highways (MoRTH) enforcing provisions on testing and calculation methods, reporting, conformity of production, carbon neutrality factors and derogation factors in consultation with concerned ministries and departments. As per The Economic Times, the notification, issued by the power ministry on September 29, 2026, establishes a 'modern, technology neutral and performance based regulatory framework' that seeks to 'accelerate the adoption of advanced fuel-efficient technologies and cleaner propulsion systems'. The CAFE-III norms will come into effect from April 1, 2027 and remain applicable up to March 31, 2032, covering new passenger vehicles manufactured or imported for sale in India.
Under the notified rules, target fleet-average fuel consumption will drop from 3.996 litres per 100 km in FY 2027-28 to 3.3273 litres per 100 km by FY 2031-32. Each manufacturer's annual average fuel consumption standard will be calculated on the Modified Indian Driving Cycle (MIDC) in petrol-equivalent litres per 100 km, with the formula a x (W - b) + c, where W is the weighted average unladen mass in kg of all new vehicles the manufacturer makes or imports for sale in India, b is fixed at 1,229 kg, and a and c values decline progressively from 0.00158 and 3.9960 in FY 2027-28 to 0.00131 and 3.3273 by FY 2031-22. The government will permit manufacturers to trade carbon credits bilaterally or purchase shortfall offsets directly from the BEE to facilitate compliance while enforcing accountability. According to The Economic Times, the standards will be calculated on the Modified Indian Driving Cycle (MIDC) based on the weighted average unladen mass of vehicles manufactured or imported for sale by each manufacturer, with the norms covering the weighted average fuel consumption of a manufacturer's eligible vehicles rather than prescribing a separate fuel economy target for every individual model. The CAFE-III norms seek over 16 per cent improvement in fuel efficiency over five years, with the fuel-consumption benchmark tightening from 3.996 litres per 100 km in 2027-28 to 3.3273 litres per 100 km in 2031-32.
To encourage electrification and alternate fuels, the final notification retains volume-derogation 'super credits' with favorable multipliers for clean powertrain sales. Battery Electric Vehicles (BEVs) & Range-Extended EVs receive 3.0 super credits, Plug-in Hybrids (PHEVs) & Strong Hybrid Flex-Fuel Vehicles get 2.5 super credits, Strong Hybrids earn 1.6 super credits, and Flex-Fuel Ethanol Vehicles receive 1.1 super credits. The regulatory buyout price will see a steep escalation over the five-year block, with the fleet fuel target set at 3.9960 L/100 km in FY 2027-28 with a BEE buyout cost of ₹2,500 per g CO₂/km, tightening to ₹4,500 per g CO₂/km by FY 2031-32. For electric models, consumption will be measured in kWh per 100 km with conversion factors of 0.1028 for electric vehicles and petrol-equivalent fuel consumption calculated as the declared tailpipe CO₂ value divided by 23.7135. The rules are less generous to EVs than the first CAFE-3 proposal, as the June 2024 draft had proposed a 4x factor for BEVs, compared with 3x in the final rules. According to The Economic Times, the price for such credits has been fixed at ₹2,500 per gram of CO₂ per km in 2027-30, rising annually to ₹4,500 in 2031-32.
The notification introduces compliance into two blocks - the first running for three years from FY 2027-28, while the second begins in FY 2030-31. Manufacturers will maintain a passbook where credits and debits are recorded - if actual fuel consumption is better than targets, the difference is treated as a credit, while excess consumption results in debits. The framework allows manufacturers to pool their credits and exchange or trade credits with other manufacturers on mutually agreed terms. A manufacturer with a debit balance can offset it by purchasing credits from the BEE, with credit exchange, buyout or combination allowed only during a specified 30-day trading window from October 1 to October 31 of each assessment year. The BEE buyout price starts at ₹2,500 per g CO₂/km in FY 2027-30 and rises to ₹4,500 in FY 2031-32. At the end of each compliance block, non-compliance will be calculated by dividing total debit in g CO₂/km by total sales during the block and multiplying by 23.7135. Manufacturers may also meet their obligations over specified two-year or three-year compliance blocks, with credits generated by those performing better than prescribed targets eligible for carry-forward within the specified blocks.
The regulations introduce carbon neutrality factors that discount a model's declared tailpipe CO₂ by 8% for ethanol-blended petrol vehicles (E20 or higher blends), 22.3% for flex fuel ethanol vehicles, 5% or the CBG blending percentage notified by the Ministry of Petroleum and Natural Gas, whichever is higher, for CNG vehicles, and actual biofuel blending percentage specified by the Ministry of Petroleum and Natural Gas for diesel vehicles. Manufacturers may claim 1.0 g CO₂/km, equivalent to 0.0422 litre per 100 km, for each eligible technology deployed in a vehicle, with an overall cap of 9.0 g CO₂/km, equivalent to 0.3795 litre per 100 km. The Gazette lists 12 eligible technologies including tyre pressure monitoring system, transmission with six or more forward gears, 12V/48V motor-generator (micro-hybrid), high-efficiency air-conditioning system, and solar-reflective paint. For high-efficiency air-conditioning and solar-reflective paint, manufacturers' self-declarations will be benchmarked after the first compliance block. During the first compliance block, energy savings will be based on self-declaration, while in the second block, claims must be supported by validated test results. The new norms significantly expand the list of recognised fuel-conservation technologies from four to 12, providing manufacturers with multiple compliance pathways including incentives for electric vehicles, hybrids, flex-fuel vehicles, alternative fuels and fuel-saving technologies.
The automobile industry has welcomed the CAFE-III norms as a comprehensive framework for sustainable mobility. Society of Indian Automobile Manufacturers (SIAM) President Shenu Agarwal stated that the framework provides clear predictability which will enable the auto industry plan investments and accelerate innovation, thereby, playing an important role in the country's journey towards Viksit Bharat in 2047. Maruti Suzuki India's Senior Executive Officer, Corporate Affairs, Rahul Bharti called the CAFE regulation a central policy instrument for accelerating India's decarbonisation and energy security journey in the mobility sector. Tata Motors Passenger Vehicles MD & CEO Shailesh Chandra emphasized that the framework is an important step towards cleaner and more sustainable mobility, with Tarun Garg, MD & CEO, Hyundai Motor India Limited terming the CAFE-III norms a positive step by the government towards advancing sustainable mobility in India. Mahindra & Mahindra's President - Automotive Business, Velusamy R noted that the framework strikes a balance between environmental requirements and industry achievability, while Vikram Gulati, Country Head & Executive VP, Toyota Kirloskar Motor observed that the regulation takes due cognisance of various clean technologies using objective and scientific based assessment methodology. Santosh Iyer, Managing Director and Chief Executive Officer of Mercedes-Benz India sees the framework as combining ambitious targets with practical compliance flexibility, with Velusamy R describing it as a pragmatic, forward-looking framework and a double win for the environment and India's energy security. However, as noted in Business Standard's editorial commentary, questions arise on whether these norms have gone far enough to drive a meaningful transition, with the CAFE III mandates an improvement of roughly 16.7 per cent in fuel efficiency over five years - a pace that may be insufficient for the rapid decarbonisation needed in the Indian automotive sector.
