India’s Ministry of Power wants automakers to cut fleet-wide carbon emissions by nearly 17% within five years, and for the first time it will let ethanol blending help do the counting. The ministry circulated the draft Corporate Average Fuel Economy, or CAFE-III, norms for public comment on Thursday, covering passenger cars sold in India from April 2027 through March 2032. Stakeholders have until August 6 to respond.
Buried in the technical language is a credit that lets manufacturers report tailpipe carbon dioxide lower than what actually leaves the exhaust, built for a country pushing ethanol into nearly every tank of petrol sold. The same draft has also reopened a year-long argument between India’s small-car specialists and its SUV-heavy rivals over who carries the heavier compliance burden.
Fuel Targets Fall Nearly 17% Over Five Years
The draft applies to M1 category vehicles, the standard classification for passenger cars built to carry up to eight people besides the driver. It would replace CAFE-II, which is due to expire on March 31, 2027.
Fleet-wide fuel consumption targets would tighten from 3.996 litres per 100 km, or 94.76 grams of CO2 per km, in 2027-28 to 3.327 litres per 100 km, or 78.90 grams per km, by 2031-32, a drop of nearly 17%. Compliance would also be checked over two multi-year blocks, an initial three-year stretch followed by a two-year one, rather than every single year as under the current system.
That would mark the third tightening of India’s fuel-efficiency rules since 2017, when the original CAFE standard set a fleet cap of 130 grams of CO2 per km and a fuel-consumption target of 5.5 litres per 100 km. CAFE-II, effective in 2022, brought that down to 113 grams per km and 4.7 litres per 100 km.
| Phase | Effective From | Fuel Consumption Target | CO2 Cap |
|---|---|---|---|
| CAFE I | 2017 | 5.5 L/100 km | 130 g/km |
| CAFE II | 2022 | 4.7 L/100 km | 113 g/km |
| CAFE III (draft) | April 2027 to March 2032 | 3.996 to 3.327 L/100 km | 94.76 to 78.90 g/km |
The scale of the market explains the pressure to keep tightening. India already ranks third worldwide in greenhouse gas emissions and fourth in annual vehicle sales, so small percentage shifts in fleet efficiency add up quickly.
The draft also proposes volume derogation, commonly called super credits, for battery electric vehicles, range-extended electric vehicles, plug-in hybrids, strong hybrids and flex-fuel vehicles, letting each one count for more than a single sale when a manufacturer’s fleet average is worked out. Automakers can separately claim up to 9 grams of CO2 per km in combined credit for approved fuel-saving technologies, capped at 1 gram per km for any single technology. Manufacturers selling fewer than 1,000 passenger vehicles a year would stay exempt.
Officials describe the phased approach as designed to give original equipment manufacturers, or OEMs, the companies that actually build the cars, room to plan. “The phased tightening of the targets will provide OEMs with a clear and predictable regulatory pathway, enabling them to progressively develop and deploy more fuel-efficient vehicle models,” a government source said.
A Carbon Credit for Every Litre of Ethanol Blended
For the first time, the draft introduces Carbon Neutrality Factors, or CNFs, that credit manufacturers for the lower lifecycle footprint of renewable fuels such as ethanol, compressed biogas and other biofuels. In practice, that lets a car report less carbon dioxide than its tailpipe actually produces before regulators check it against the target.
- E20-compatible petrol cars, strong hybrids and plug-in hybrids – an 8% cut to declared tailpipe CO2 for running on today’s ethanol blend
- Flex-fuel ethanol vehicles and flex-fuel strong hybrids – a 22.3% carbon-neutrality benefit, the richest on offer, according to Business Today’s review of the draft text
- CNG-powered cars – a 5% benefit, rising with the government’s notified compressed biogas blend level
- Diesel models – a benefit tied to whatever biofuel blending level regulators notify
None of those numbers change what actually leaves the exhaust pipe. They change how that exhaust gets scored.
The mechanism plugs into a national push that is already large. India’s ethanol-blending program targeted 20% nationwide blending by October 2025, and in 2022-23 alone it had cut close to 10.8 million tonnes of net CO2 emissions while saving more than ₹243 billion, or roughly $2.9 billion, in fuel-import costs, per the Observer Research Foundation.
Why Are Maruti Suzuki and Tata Motors Still Divided?
Small-car specialists and SUV-heavy rivals have clashed over CAFE-III for close to a year because the rules are built around vehicle weight, and lighter cars sit closer to the toughest end of the curve. Maruti Suzuki wants weight-based relief. Tata Motors and Mahindra call that a carve-out for one competitor.
Executives at Maruti Suzuki, Toyota Kirloskar Motor, Honda Cars India and Nissan Motor India have pushed for a separate, softer track for small cars, arguing thin margins leave little room to absorb hybrid or electric hardware. Tata Motors, Mahindra & Mahindra, Hyundai Motor India and Kia India have opposed any carve-out, saying it would reward one manufacturer over the rest of the industry.
We have absolutely no concerns in meeting the CAFE norms even with a high share of small cars, and we see no justification for special concessions.
Shailesh Chandra, a Tata Motors executive, said that last November after the company reported its second-quarter earnings. Maruti Suzuki chairman R.C. Bhargava has made the opposite case, arguing the formula grows less favorable to small cars as their weight drops, while Chandra has separately raised safety concerns, noting that no model under 909 kilograms currently carries a rating from Bharat NCAP, India’s new-car crash-test program.
Industry body Society of Indian Automobile Manufacturers (SIAM) could not agree on one position when the fight was at its peak. By Thursday’s release, SIAM had swung behind the framework as balanced, though individual carmakers were still pushing for relief on small petrol cars, according to news agency coverage of the draft.
Four Drafts in Ten Months
Thursday’s release is not the government’s first attempt to get this rule right.
- September 2025: the first CAFE-III draft proposes a 3 gCO2/km relief for petrol cars under 909 kg, widely read as tailored to Maruti Suzuki’s lineup.
- February 2026: the Power Ministry drops that carve-out after Tata Motors and Mahindra object, arguing it would hand one competitor an unfair edge.
- April 8, 2026: the Bureau of Energy Efficiency (BEE) issues a softened curve, easing overall stringency by roughly 21% versus the September proposal.
- April 16, 2026: automakers meet ministry officials and call the revised draft a balanced framework, even as the small-car question resurfaces.
- July 16, 2026: the Ministry of Power circulates this newest draft, adding ethanol and biofuel carbon-neutrality credits for the first time.
- August 6, 2026: deadline for stakeholders to submit feedback.
- April 1, 2027: CAFE-III is scheduled to take effect, a date officials say will not move.
Union Road Transport Minister Nitin Gadkari signaled the shift a year earlier, saying the framework had until then largely favoured electric vehicles alone and needed to make room for flex-fuel cars too.
What a Missed Target Costs an Automaker
Manufacturers who beat their targets earn compliance credits that carry forward within a compliance block. Those who fall short can carry forward past credit, pool voluntarily with other manufacturers, or buy credits from the BEE.
The starting buy-out price is ₹2,500 per credit, rising by ₹500 every year, with each credit worth 1 gram of CO2 per km. OEMs that still fall short face penalties under the Energy Conservation Act, the same law whose December 2022 amendment set fines of ₹25,000 per vehicle for a shortfall under 0.2 litres per 100 km and ₹50,000 per vehicle beyond that, on top of a ₹10 lakh base penalty.
Hyundai already knows what that can mean in practice. A CAFE-linked penalty once cost the automaker almost 60% of its FY23 profit.
The pressure to tighten is climate-driven as much as commercial. One modelling study projects India’s road transport emissions reaching 392 million tonnes of CO2 equivalent by 2030, roughly 50% above the trajectory needed for the country’s COP26 pledge.
Showrooms will likely tilt further toward hybrids, flex-fuel models and EVs as the deadline nears, while older petrol and diesel engines that cannot be retooled cheaply will start disappearing from price lists. The government has said the April 2027 start date will not move, even as the numbers inside the draft keep changing.
Frequently Asked Questions
What Vehicles Does the Draft CAFE-III Norm Cover?
The draft applies only to M1 category vehicles, the standard classification for passenger cars, not two-wheelers, trucks or buses. Manufacturers selling fewer than 1,000 passenger vehicles a year continue to be exempt, the same threshold carried over from the outgoing CAFE-II framework.
Does CAFE-III Regulate Pollution or Just Carbon Emissions?
CAFE norms govern a manufacturer’s fleet-average fuel consumption and carbon dioxide output, not individual pollutants. Nitrogen oxides and particulate matter are capped separately under India’s Bharat Stage emission-standard rules, which apply regardless of how a vehicle scores under CAFE-III.
What Happens to Unused Compliance Credits?
Credits earned by beating a target can be carried forward only within the same compliance block. Anything left over when a block ends simply lapses, so automakers cannot bank efficiency gains indefinitely against a future shortfall.
Will CAFE-III Make Cars More Expensive?
Likely at the point of sale, since brands will need to add efficiency hardware to meet the tighter curve. Running costs should fall over a car’s life as real-world fuel efficiency improves, a trade-off buyers are expected to feel in the showroom before they feel it at the pump.
Why Did the Government Soften the Draft in April 2026?
The Bureau of Energy Efficiency eased the compliance curve’s slope and raised the reference vehicle weight in its April 8 revision, cutting overall stringency by roughly 21% compared with the September 2025 proposal, after manufacturers warned the original numbers were too steep for the fixed 2027 start date.
What Happens After the August 6 Deadline?
The Ministry of Power will review stakeholder submissions before notifying a final rule. Officials have repeatedly said the April 1, 2027 start date will not be pushed back, even though the underlying targets have already been revised more than once since September 2025.
