Automakers may get to trade fuel-efficiency credits to meet stricter CAFE norms

New Delhi: India plans to allow automakers trade fuel-efficiency credits among themselves, creating a broader market mechanism to help companies meet the stricter Corporate Average Fuel Efficiency (CAFE) norms and avoid government penalties, said officials familiar with the plan.

The move will let automakers exceeding fuel-efficiency targets to sell surplus credits to those who are lagging, boosting the latter's scores. "Pooling and trading of carbon credits is a globally established model," said a senior industry executive, who didn't wish to be named. "In such a mechanism, manufacturers who do not meet emission guidelines can purchase credits from companies who have surplus.

Also read: EVs likely to lose zero-emission tag under CAFE III


Technically, we cannot say there is no penalty as those deficient would have to pay a price. Pooling allows market forces to take over..." Automakers will have to choose from a dozen approved technology interventions such as electric water pumps, regenerative braking, and solar reflective paints to lower average fleet emissions and gain fuel-efficiency credits. This is against the industry's demand for 124 such technologies. The proposals form part of the draft CAFE norms being examined by the government.

The latest plans would offer automakers some relief. A September 2025 draft on CAFE-III norms had proposed a limit on forming a single compliance pool to a maximum of three original equipment manufacturers (OEMs).

"This three-OEM cap has now been removed," a senior official told ET, adding the latest alteration of the CAFE norms would permit an unrestricted number of automakers to form a single entity for regulatory evaluation.

Also read: India may take middle path for car companies under CAFE III: What it means for small and large players

Points System

As per the proposed norms, sellers of electric vehicles (EVs) or range-extender hybrid EVs will be given three super credits, while fuel-efficient Internal Combustion Engine (ICE) cars will fetch one point.

Each OEM will need to earn a minimum number of points or credits linked to the weight of the vehicles they sell. Those failing to comply with the CAFE-III norms could face financial penalties.

Baseline metrics for calculating fleet emission targets is also expected to be updated in CAFE-III, making it technically harder for companies to meet the goals.