Four-scenario supply-demand model for the CAFE-III OTC credit market — base case ₹12,360 Cr, EU phase-out ₹31,730 Cr, with the full clearing math every OEM treasury team needs to reproduce.
Each year, BEE's passbook ledger computes every OEM's position: target, effective fleet average, surplus or deficit. Surplus OEMs hold credits denominated in g-units — one g-unit equals one gramme of CO2/km of avoided emissions across one unit of sales. Deficit OEMs need to either close the gap operationally, buy credits OTC from surplus OEMs, buy from BEE's direct sell-leg, or pay the EC Act Section 26 penalty.
The OTC market is peer-to-peer with the BEE passbook as ledger. The BEE direct sell-leg acts as a soft price band — it sets an effective floor at ₹2,500/g-unit (the price at which BEE will sell credits to anyone who wants them) and an effective ceiling at ₹4,500/g-unit (the price above which credits become uncompetitive against direct purchase from BEE).
Two markets in one
The CAFE-III market is structurally two markets stacked: the OEM-to-OEM OTC market (where the real volume should clear) and the BEE direct sell-leg (the market-maker mechanism). The OTC price moves within the ₹2,500-4,500 BEE band based on supply-demand. The BEE leg is the backstop when the OTC market does not clear.
The market does not clear at a single point — it clears across a band based on the S/D ratio. The clearing-price function is piecewise linear:
floor + (ceiling − floor) × (1 − (S/D − 0.85) / 0.65)The interpolation logic produces a clearing price that smoothly transitions across the band. A market at S/D 1.2 clears at ~₹3,200/g-unit. A market at S/D 0.9 clears at ~₹4,400/g-unit.
The Excel CAFE-III model bracket the realistic range with four scenarios. The headline output values are derived from the full OEM-by-OEM build in the model.
| Scenario | 5-yr OTC market value | S/D ratio | Clearing price |
|---|---|---|---|
| Base case (3.0× flat) | ₹12,360 Cr | 7.03 (heavy supply) | Floor ₹2,500 |
| EU phase-out (3.0 → 1.0) | ₹31,730 Cr | 0.85 (balanced) | Mid-range moving to ceiling |
| Downside (BEV −25%, no pooling) | ~₹15,000 Cr OTC + ~₹40,000 Cr penalty | <0.5 (undersupplied) | Ceiling ₹4,500 |
| Upside (BEV +25%, pooling on) | ~₹4,000 Cr | >10 (extreme oversupply) | Floor |
Why the downside makes the largest market
The downside scenario produces the largest aggregate value because penalty value dominates — OEMs that cannot meet target and cannot buy enough credits pay the full EC Act Section 26 schedule directly. The OTC market is only ~₹15K Cr; the penalty exposure adds another ~₹40K Cr on top. The upside produces the smallest market because pooling allows internal netting and lax enforcement removes the demand floor.
Want a sensitivity slider across all four scenarios for your OEM?
See it in TerraNova →In the base case, the supply side is dominated by four OEMs — Tata Motors, MG Motor (JSW-MG), BYD India, and Toyota Kirloskar — with Tata accounting for over half of total industry supply.
| Source | Base case (3.0× flat) | EU phase-out (3.0→1.0) |
|---|---|---|
| Tata Motors (5-yr cumulative) | ~60M g-units | ~22M g-units |
| MG Motor (JSW-MG) | ~9M g-units | ~3.5M g-units |
| BYD India | ~7M g-units | ~3M g-units |
| Toyota Kirloskar | ~5M g-units | ~3M g-units |
| Volvo + others | ~1.5M g-units | ~0.8M g-units |
| Total industry supply | ~82M g-units | ~32M g-units |
The phase-out scenario cuts supply by ~60% because every BEV in every supply-side OEM's fleet now generates less denominator inflation. Tata loses the most in absolute terms; smaller pure-EV players (BYD, Volvo) lose proportionally.
Demand is more diversified than supply. Maruti is the single largest buyer by absolute exposure simply because of volume; Hyundai-Kia together represent the next major block; premium European importers add concentrated, ceiling-adjacent demand.
| Buyer | Base case 5-yr demand (g-units) |
|---|---|
| Maruti Suzuki (1.5 g/km × 1.85M units avg) | ~14M |
| Hyundai + Kia combined (~9 g/km × 900K avg) | ~11M |
| Mahindra (4 g/km × 500K avg) | ~3.5M |
| Skoda-VW India (no pooling) (~22 g/km × 100K) | ~3M |
| Mercedes-Benz, BMW, Audi combined | ~2.5M |
| Honda, Renault-Nissan, others | ~2M |
| Total industry demand | ~36M g-units |
Base case S/D ratio is therefore ~82M / ~36M = ~2.3. Once banked carry-forward is added in, the effective S/D climbs to ~7.0 because BEV-heavy OEMs generate credits faster than the deficit OEMs need them, and the gap accumulates.
The model runs every formula at OEM-year granularity. Below is the full per-OEM compliance math and the market-clearing logic.
ICE CO2/year = ICE_base × (1 − ICE_improvement)year_idx (default 1%/yr improvement)ICE WLTP = ICE MIDC × 1.18 (or 1.0 if WLTP delayed)SHEV WLTP = ICE WLTP × 0.80 (SHEV ~20% better than ICE)Numerator = ICE_units × ICE_WLTP + SHEV_units × SHEV_WLTP + BEV_units × 0Denominator = ICE + SHEV × 1.6 + BEV × 3.0Raw fleet average = Numerator / DenominatorOff-cycle applied = MIN(claimed_tech_count_g, 6 g/km cap)Effective average = MAX(0, Raw − Off-cycle)OEM-specific Standard (L/100km) = a × (W − b) + c — with a = 0.002, b = 1,170 kg, c per Table 1 (e.g. FY28 c = 3.7264)Convert to g CO2/km = Standard (L/100km) × 23.7135 (petrol-equivalent factor per draft Section 4(3))Margin = Target − EffectiveCredits earned (g-units) = Margin × units (positive = surplus, negative = deficit)The statutory penalty is measured in litres per 100 km, not directly in g/km. A single threshold sits at 0.2 L/100 km. For internal modelling, OEMs convert their CAFE g/km shortfall to a litres/100 km equivalent using the relevant fuel-mix factor (gasoline: 1 L petrol ≈ 23.2 g/km CO2 per km; diesel: 1 L diesel ≈ 26.3 g/km).
Shortfall ≤ 0.2 L/100 km: Penalty = ₹25,000 × unitsShortfall > 0.2 L/100 km: Penalty = ₹50,000 × unitsMarket S/D ratio = Supply / DemandIf S/D > 1.5: clearing = BEE floor (₹2,500)If S/D < 0.85: clearing = BEE ceiling (₹4,500)Else: clearing = floor + (ceiling − floor) × (1 − (S/D − 0.85) / 0.65)OTC value = MIN(supply, demand) × clearing priceBanked = MAX(0, supply − demand)Banked value = Banked × clearing × 0.4 (carry-forward time-value discount)Unmet = MAX(0, demand − supply)Penalty value = Unmet × 0.5 × ₹37,500 (blended Tier-1/2 rate)BEE buy-leg value = Unmet × 0.5 × ₹4,500Formula-Level Access
Every formula on this page is implemented in the TerraNova-for-CAFE Excel companion model — 8 sheets, 1,875 formulas, fully audit-ready.
Request the model →Five variables move the clearing price more than anything else. Three of them are policy (super-credit schedule, pooling provisions, enforcement intensity); two are operational (BEV ramp delivery, WLTP cycle baseline). Modelling these as levers in TerraNova for CAFE produces the per-OEM scenario engine.
Part 7 covers TerraNova for CAFE — the workspace that combines onboarding, dashboard across regimes, decarb-lever planning under super-credits, Compliance Manager projections, and the 5-year market-watch view.
Part 2 — CAFE-III Mechanics · Part 5 — Cost Exposure · Part 7 — TerraNova for CAFE
Primary regulatory sources and verified analysis cited above.
From per-OEM cost exposure to the 5-year credit-market view, Climate Decode helps Indian passenger-vehicle OEMs sequence the CAFE-III response with finance-grade clarity.