Featured image credit: Image: Rishavnandi08 via Wikimedia Commons (CC BY-SA 4.0). Source

By Piyush P. Yadav

From 1 April 2027, every carmaker selling in India will have to meet a new fleet-wide fuel-efficiency target under the third round of Corporate Average Fuel Efficiency norms, known as CAFE-III. The Bureau of Energy Efficiency issued the draft on 16 July 2026 under the Energy Conservation Act, took comments until 6 August 2026, and a government official has told Autocar India the April 2027 start date is unlikely to be extended. The rules run for five years to 31 March 2032.

CAFE-III matters to EV buyers for one reason above all: it is the mechanism that decides how many electric cars manufacturers must sell to avoid penalties, and therefore how hard they will push EVs on price. Under the draft, each battery-electric car counts as three cars in the fleet average. This explainer sets out the targets, the super-credit multipliers, the penalty and credit-trading system, who lobbied for what, and why environmental groups argue the rules will need only 8 per cent EV sales to comply.

What CAFE norms are and why the third round is different

CAFE norms set a maximum average CO2 emission, expressed as fuel consumption in litres per 100 km, across all the passenger cars a manufacturer sells in a financial year. The company can sell gas-guzzlers as long as it sells enough efficient or zero-emission cars to bring the average under the line. CAFE-I ran from 2017-18 and CAFE-II from 2022-23. CAFE-II set a fleet target of 113 g CO2/km.

CAFE-III tightens that substantially and changes how the target is calculated. The reference weight used to set each manufacturer’s target line has been raised from 1,170 kg in the September 2025 draft to 1,229 kg in the July 2026 draft, which softens the curve for heavier vehicles. The previous small-car relaxation, which gave a 9 g CO2/km discount to cars under 909 kg, has been removed after Tata Motors, Mahindra, Hyundai and Kia opposed differential treatment; Maruti Suzuki and Toyota Kirloskar had argued for keeping it.

The targets, year by year

The fleet-wide target falls each year over the five-year window. The starting point in FY2027-28 is 3.996 litres per 100 km, equivalent to 94.76 g CO2/km. By FY2031-32 the draft requires 3.3273 litres per 100 km, or 78.90 g CO2/km. Down to Earth’s reading of the same draft puts the final-year figure at 76.77 g CO2/km; the difference comes from how the carbon-neutrality factors described below are applied. Either way, the reduction is between 21 and 34 per cent against CAFE-II.

Financial year Fleet fuel consumption target Equivalent CO2 target
2027-28 3.996 L/100 km 94.76 g/km
2028-29 to 2030-31 Annual step-downs (draft schedule) Between 94.76 and 78.90 g/km
2031-32 3.3273 L/100 km 78.90 g/km (76.77 g/km per Down to Earth)
CAFE-II (for reference) 4.78 L/100 km 113 g/km

Super credits: one EV counts as three cars

The single most important provision for the EV market is the super-credit table. Each zero- or low-emission car is counted more than once when the fleet average is computed, which dilutes the emissions of the petrol and diesel cars sold alongside it. The draft keeps the electric multiplier at 3.0 for the entire 2027-32 cycle while cutting the multipliers for strong hybrids and flex-fuel vehicles.

Powertrain CAFE-II multiplier CAFE-III draft multiplier
Battery electric vehicle 3.0 3.0
Range-extended electric vehicle 3.0 3.0
Plug-in hybrid 2.5 2.5
Strong hybrid 2.0 1.6
Flex-fuel (ethanol) vehicle 1.5 1.1

The practical effect: a manufacturer that sells 10,000 EVs is credited as if it sold 30,000 zero-emission cars. For Tata Motors, which took a 43 per cent share of the 30,418 electric cars sold in August 2026, that is a large cushion for its diesel SUV portfolio. For Maruti Suzuki, whose electric sales are a fraction of its volume, the reduced hybrid multiplier makes its strong-hybrid strategy less effective as a compliance tool than it was under CAFE-II. This is one reason Maruti has accelerated the e Vitara and, as we reported, become India’s largest EV exporter while planning four electric models by FY2031.

Carbon neutrality factors: the ethanol discount

For the first time, the draft grants a tailpipe discount to vehicles running on biofuels, treating a portion of their emissions as carbon-neutral. Cars certified for E20 to E30 petrol get an 8 per cent reduction, flex-fuel ethanol vehicles 22.3 per cent, and CNG cars 5 per cent. Since almost every petrol car sold in India is now E20-compatible, the 8 per cent discount applies nearly fleet-wide and is the main reason Down to Earth calculates a lower effective target than the headline figure.

Critics argue this rewards fuel blending that happens at the pump rather than any efficiency improvement in the car. Supporters, including the biofuel and sugar industries, argue it reflects lifecycle emissions. The government has sided with the latter in the current draft.

Penalties and credit trading

CAFE-III introduces a market mechanism. A manufacturer that beats its target earns credits it can sell to one that misses. A manufacturer that misses and cannot buy enough credits can purchase them from the Bureau of Energy Efficiency at a fixed price that rises through the cycle: Rs 2,500 per g CO2/km of shortfall in FY2027-28, rising to Rs 4,500 per g CO2/km by FY2031-32. The statutory penalty under the Energy Conservation Act, for those who neither comply nor buy credits, is Rs 5,000 per g CO2/km.

Compliance route Cost per g CO2/km of shortfall
Buy credits from another manufacturer Negotiated
Buy credits from BEE (FY2027-28) Rs 2,500
Buy credits from BEE (FY2031-32) Rs 4,500
Statutory penalty (non-compliance) Rs 5,000

The cost is per gram per kilometre of fleet-average shortfall, multiplied across the fleet, so a manufacturer selling 15 lakh cars a year that misses by 2 g/km faces a bill in the hundreds of crores. That is a strong incentive to sell EVs, and it also creates a revenue line for EV-heavy companies, which will have surplus credits to sell. Tata Motors and Mahindra are the obvious sellers; Maruti Suzuki, Toyota and Honda the obvious buyers, at least in the early years.

How much EV penetration does CAFE-III actually require?

This is where the argument lies. The government’s stated aim is a 31 per cent reduction in fleet emissions. Down to Earth’s analysis of the draft, published on 6 August 2026, estimates that once the 3x EV multiplier, the softened weight curve and the ethanol discount are combined, the real-world reduction by FY2031-32 is about 13.8 per cent, and that manufacturers can comply with EV sales of only about 8 per cent of volume. Electric cars were 5.7 per cent of four-wheeler sales in August 2026, so on that reading the norms require only a modest acceleration.

The India Energy and Climate Center at UC Berkeley made a similar case for the earlier draft, arguing that CAFE-III and the planned CAFE-IV need to be tighter to be consistent with India’s 2030 EV target of 30 per cent of new car sales. Industry, through SIAM, has argued the opposite: that the targets are aggressive for a market where small petrol cars dominate and where EV charging infrastructure is still thin, a problem we documented in our report on charger utilisation and the 2030 target.

What it means for buyers

Three effects are likely from April 2027. First, EV prices should soften relative to petrol cars, because every EV sold generates a compliance credit worth real money to the manufacturer. Expect that value to be shared with buyers through discounts, especially in the final quarter of each financial year when companies square their fleet averages. Second, hybrid buyers lose some of their indirect subsidy: with the multiplier cut from 2.0 to 1.6, a strong hybrid is worth less to its maker, which reduces the incentive to price it aggressively. Third, small petrol cars lose the weight relaxation, which may push their prices up slightly or accelerate the shift to E20-optimised engines.

CAFE-III sits alongside the demand-side schemes we track. PM E-DRIVE, extended to March 2028 with Rs 11,900 crore, subsidises the buyer; CAFE-III pressures the seller. The GST differential (5 per cent on EVs against 28 per cent plus cess on petrol cars) does both. Together they form the policy stack that will decide whether India reaches 30 per cent EV penetration in cars by 2030, or settles nearer the 8 per cent that critics say CAFE-III alone would deliver.

What is still open

The draft is not yet a final notification. The inter-ministerial process involving the Ministries of Power, Heavy Industries and Road Transport concluded its consultations after the 6 August deadline, and the final rules are expected before the end of 2026. The points most likely to change are the weight reference (industry wants it higher), the ethanol factors (environmental groups want them removed) and the credit price schedule. The April 2027 start date and the 3x EV multiplier appear settled.

Sources & Further Reading

Frequently Asked Questions

When do CAFE-III norms come into effect in India?

The draft applies from 1 April 2027 to 31 March 2032. A government official has said the start date is unlikely to be extended. The final notification is expected before the end of 2026.

What is the CAFE-III fleet emission target?

The fleet-wide target starts at 3.996 litres per 100 km (94.76 g CO2/km) in FY2027-28 and falls to 3.3273 litres per 100 km (about 78.90 g CO2/km) by FY2031-32, a 21 to 34 per cent tightening over CAFE-II’s 113 g/km.

How do EV super credits work under CAFE-III?

Each battery-electric car is counted as three vehicles in the fleet average for the whole 2027-32 cycle. Plug-in hybrids count 2.5, strong hybrids 1.6 (down from 2.0) and flex-fuel vehicles 1.1 (down from 1.5).

What is the penalty for missing CAFE-III targets?

Manufacturers can buy credits from others or from the Bureau of Energy Efficiency at Rs 2,500 per g CO2/km in FY2027-28, rising to Rs 4,500 by FY2031-32. The statutory penalty for non-compliance under the Energy Conservation Act is Rs 5,000 per g CO2/km.