What the Draft CAFE-III Norms Mean for India’s Passenger Vehicle Industry: TERI Analysis

The Bureau of Energy Efficiency (BEE), Ministry of Power, has released the draft notification for the third phase of India’s Corporate Average Fuel Economy (CAFE-III) norms for passenger vehicles, proposing a more stringent yet flexible regulatory framework from FY 2027–28 onwards. To help journalists quickly understand the proposed changes, TERI has prepared a Media Brief (Ready Reckoner) highlighting the key regulatory provisions, major departures from earlier CAFE phases, and their likely implications for vehicle manufacturers and India’s transition towards cleaner mobility. The analysis notes that while the draft norms significantly tighten fleet-average CO2 emission targets over the implementation period, they also introduce greater compliance flexibility through mechanisms such as compliance credits, voluntary pooling and a buyout framework. TERI’s assessment also identifies areas where the draft notification could be further strengthened during the public consultation process to maximize innovation, transparency and environmental outcomes. Ready Reckoner Draft CAFE-III Norms for Passenger Vehicles and TERI’s Analysis The Ministry of Power (MoP) released the draft notification on July 16, 2026 for the next phase of India’s Corporate Average Fuel Economy (CAFE) norms, applicable to M1 category vehicles from Financial Year (FY) 2027-28 onwards. The latest draft notification introduces several changes that make the regulation more flexible, including the rationale of providing ease of doing business by introducing flexible compliance mechanisms, and a gradual transition towards WLTP. In this ready reckoner, TERI analyses the key impacts and implications on regulatory compliance related to the latest draft notification issued by Bureau of Energy Efficiency (BEE), MoP on CAFE-III. This document covers the actual annual corporate fleet emissions (gCO2/km), super-credits, year-wise stringency for various categories of vehicle, credit-debit mechanism, and comparison of the latest draft notification vis-à-vis previous phases of CAFE. The latest draft introduces market-based compliance framework, i.e. Original Equipment Manufacturers (OEMs) exceeding their prescribed fleet-average fuel consumption targets can now generate compliance credits, carry them forward within defined compliance blocks, or exchange them with other manufacturers through voluntary pooling. In case of a compliance shortfall, OEMs may also offset debits through a buyout mechanism administered by BEE. These provisions introduce greater flexibility while encouraging early adoption of fuel-efficient technologies. Table 1: Key highlights of CAFE Norms Parameter CAFE-I CAFE-II Proposed CAFE-III Notification status Notified Notified Draft Notification (under public consultation) Applicability M1 Implementation Period FY 2017-18 onwards FY 2022-23 onwards FY 2027-28 to FY 2031-32 Annual Average Fuel Consumption (AAFC) AAFC = a × (W − b) + c Slope (a) 0.0024 0.002 0.00158 (FY 2027-28) to 0.00139 (FY 2030-31) Industrial average weight (b) in kgs 1037 1082 1229 Corporate Average CO2 emissions (gCO2/km) at b <130 <113 94.76 (FY 2027-28) 91.534 (FY 2028-29) 89.127 (FY 2029-30) 83.74 (FY 2030-31) 76.768 (FY 2031-32)* Testing protocol MIDC MIDC MIDC + mandatory reporting under WLTP *TERI estimates based on CAFE-III notification (without applying CNF) According to TERI's analysis, the proposed norms increase overall stringency by approximately 21% in the first year, rising to nearly 34% by FY 2031-32 compared to CAFE-II. However, compared to the draft notification released in 2025, the revised proposal is relatively more lenient for lighter passenger vehicles while becoming progressively stringent for higher vehicle weight categories due to the reduced slope in the target equation. Consequently, OEMs with lighter fleet averages are likely to experience comparatively lower compliance pressure than OEMs with heavier vehicle portfolios. Figure 1: CO2 targets v/s unladen mass under CAFE-III Source: TERI The draft also broadens the scope of technology incentives. OEMs can claim fuel consumption benefits for certified technologies such as automatic start-stop systems, regenerative braking, tyre pressure monitoring systems, efficient alternators, LED lighting, advanced glazing, electric water pumps, and high-efficiency air-conditioning systems. In addition, the notification retains the Carbon Neutrality Factors (CNFs) for ethanol-blended fuels, flex-fuel vehicles, CNG and biofuel blends, while continuing super credits for battery electric vehicles, plug-in hybrids and strong hybrids. Since automatic start-stop systems are already widely available across several passenger vehicle models in India, continuing to provide additional fuel consumption credits for this technology may not adequately reward novel innovation, and future incentives should instead focus on advanced technologies that deliver incremental efficiency improvements. Further, certain vehicle categories eligible for super credits may already be equipped with technologies that are mandatory or inherently integrated into those vehicle types. In such cases, allowing additional technology-based incentives could result in double counting of compliance benefits. Further, some of the vehicle type under super credits and fitted with these technologies which may be mandated in nature for that type of vehicles, may use more incentives. This may be the case for double accounting, and there is a lack of clarity on this. Another important development is the mandatory reporting of vehicle performance under both the Modified Indian Driving Cycle (MIDC) and the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). While compliance during this phase will continue under MIDC, dual reporting is expected to facilitate India's gradual transition towards WLTP. As per MoRTH GSR 180 (E), Plug-in Hybrid Electric Vehicles (PHEVs) and Range-Extender Hybrid Electric Vehicles (REEVs) have been defined as strong hybrid electric vehicles with off-vehicle charging or rechargeable energy storage. A REEV has an on-board engine and therefore cannot be equated with Battery Electric Vehicle (BEV), which are zero-emission at the tailpipe. Treating REEVs like BEVs weaken the intent of super-credits. Further, there is a scope of refinement in the proposed compliance buyout framework. While the draft specifies a buyout price for compliance deficits, introducing a floor pricing linked to the magnitude of non-compliance could improve market efficiency and encourage stronger investments in fuel-efficient technologies. With suitable refinements during the public consultation process, the proposed norms can play a pivotal role in reducing fuel consumption, lowering greenhouse gas emissions, enhancing energy security, and accelerating India's transition towards cleaner mobility. TERI hopes this media brief serves as a useful reference for journalists covering developments related to India’s vehicle fuel-efficiency standards and the country’s broader clean mobility transition. The Institute will continue to provide evidence-based analysis on policy measures that advance energy security, climate action and sustainable transport.