The CAFE rulebook from first principles — four policy goals, the BEE/MoRTH split, the 113 g/km baseline running through FY27, and where India sits between US and EU stringency.
Corporate Average Fuel Efficiency — CAFE — is the regulation that sets a ceiling on the average CO2 emissions of every passenger car an automaker sells in India in a given year. It does not tell any single car what to emit. It tells the maker that across everything it sold, the sales-weighted average has to come in below a target. If Maruti sells 1.8 million cars, the average CO2 across those 1.8 million has to clear the bar — how it gets there is up to Maruti.
Worth remembering
CAFE is a fleet-average rule, not a per-model rule. That is the whole point of the design. It lets makers balance a heavy SUV with a small hatchback, or an ICE with a BEV, as long as the weighted total stays under target.
Need to see your OEM's CAFE-II position before CAFE-III lands?
Book a 30-min walkthrough →CAFE exists in India because four separate policy goals all point in the same direction. None of them on its own would have produced a regulation this stringent — together, they made it close to inevitable.
India imports about 85% of its crude oil. The transport sector consumes roughly 45% of all refined product. Every percentage point of fleet-efficiency improvement reduces the oil-import bill in foreign exchange. For a country that runs a structural current-account deficit, this is not a marginal concern.
Transport is around 14% of India's total CO2 emissions, and passenger vehicles are the fastest-growing segment as middle-class motorisation accelerates. CAFE is the single largest lever India has on transport-sector CO2.
Indian cities have a chronic PM2.5 and NOx problem, and ICE vehicles are major contributors. CAFE runs alongside BS-VI (India's Euro 6 equivalent) and the newer Real Driving Emissions rules. The fuel-efficiency push is part of the same package as the criteria-pollutant push.
Compliance pressure under CAFE nudges OEMs toward BEVs and strong hybrids, complementing PLI-Auto, PLI-ACC, PM E-DRIVE (the FAME successor), and state EV policies. The credit-trading mechanism coming under CAFE-III creates a financial flywheel for early movers and a cost on laggards. It is industrial policy disguised as environmental regulation — or the other way around — depending on who you ask.
Unlike most carbon-market regulations, CAFE is administered by multiple agencies with distinct roles. Understanding the split matters because lobbying, enforcement and methodology all sit in different chains of command.
| Body | Role |
|---|---|
| BEE (Bureau of Energy Efficiency) | Designs the targets, sets methodology, runs the passbook, issues credits, oversees the OEM-to-OEM credit market. Reports to the Ministry of Power. The driver behind CAFE-III stringency. |
| MoRTH (Ministry of Road Transport & Highways) | Enforces penalties under the Energy Conservation Act as amended in 2022 (Section 26). Slower-moving, generally more sympathetic to OEM lobbying than BEE. Whether enforcement happens is mostly a MoRTH call — though the March 2026 ₹2,728 Cr levy on 9 OEMs (see below) confirms the mechanism does fire. |
| ARAI (Automotive Research Association of India) | Runs the test cycles and publishes certified CO2 values per model variant. Owns the AIS:175 standard that defines the WLTP transition. The technical referee. |
| SIAM (Society of Indian Automobile Manufacturers) | Industry interface that aggregates and feeds OEM data to BEE/MoRTH. Not a regulator; closer to a lobby body. |
| VAHAN | The public vehicle-registration database that serves as ground truth for monthly sales. What BEE's passbook is reconciled against. |
Why the split matters
BEE wants stringency; MoRTH wants industrial calm. That tension is why CAFE-II penalties have not been formally levied, even though several OEMs have been in deficit. The notification expected in H2 CY2026 will reveal which way the balance has fallen for CAFE-III.
The TerraNova View
TerraNova for CAFE maps every BEE / MoRTH / ARAI data feed to your fleet position automatically — no spreadsheet pinging required.
Explore TerraNova →CAFE does not sit on a single piece of legislation. It is layered across four acts and a body of subordinate rules.
The 2022 amendment to the Energy Conservation Act is the single most consequential piece of legislation behind CAFE-III. It does two things at once: amended Section 26 sets the per-vehicle penalty schedule that makes non-compliance financially painful, and the newly inserted Section 14AA gives BEE the authority to issue and trade carbon credit certificates that underpins the entire OEM-to-OEM credit market. Without both, the credit market has no clearing price because there would be no enforceable demand floor.
The version of CAFE running through FY27 is deliberately straightforward. There is a single fleet-average target, no super-credits, no off-cycle technologies, no credit trading, no banking. Each fiscal year is tested on its own. The point of this phase, from BEE's perspective, has been to build the passbook and the data infrastructure — not yet to bite.
| Parameter | CAFE-II value |
|---|---|
| Industry target | 113 g CO2/km, flat FY23-FY27 |
| Test cycle | MIDC (India's modified version of the 1990s-era NEDC) |
| Coverage | M1 category passenger vehicles, under 3,500 kg gross vehicle weight |
| Mass curve (S.O. 5020(E), 6 Dec 2021) | a · (W − b) + c, with a = 0.0028 L/100km per kg, b = 1,037 kg, c calibrated to ~4.78 L/100km industry average (~113 g/km MIDC) |
| BEV treatment | 0 g/km in numerator, 1× in denominator — no super-credit |
| SHEV/PHEV/MHEV | No formal recognition — treated as ICE |
| Off-cycle credit | None formal |
| Credit trading / banking | None — no OTC market, no carry-forward |
| Compliance test | Annual, each FY independent |
| Penalty | Per Section 26 of the EC Act as amended in 2022 — see next section |
The mass-curve is worth dwelling on. CAFE does not set the same target for every OEM. A maker selling heavier cars on average gets a slightly more lenient target, because heavier vehicles are physically harder to make efficient. The CAFE-II formula uses constants a = 0.0028 L/100km per kg, b = 1,037 kg, with c calibrated to deliver an industry-wide ~4.78 L/100km (~113 g CO2/km on MIDC). For CAFE 2027, the September 2025 draft proposed a flat slope a = 0.002 with b = 1,170 kg; the February 2026 revised draft circulated to industry (per The Hindu) switched to a time-varying slope starting at 0.00153 in FY28 declining to 0.00128 in FY32. Whether the curve shape is fair is one of the open issues for CAFE 2027 (Part 4).
Want the ₹750 Cr / ₹4,950 Cr penalty math reproduced for your OEM?
See the model →Section 26 of the Energy Conservation Act, as amended in 2022, sets a per-vehicle penalty that scales with the shortfall and the volume sold. Crucially, the shortfall is measured in litres per 100 km of fuel consumption — not directly in grammes of CO2 per km. There is a single threshold, not a tiered scale.
| Band | Shortfall | Rate |
|---|---|---|
| Lower band | Up to 0.2 L/100 km | ₹25,000 per vehicle |
| Upper band | Above 0.2 L/100 km | ₹50,000 per vehicle |
| Base | Flat | ₹10 lakh per OEM per fiscal year |
Converting between litres-per-100-km and g CO2/km depends on fuel type (gasoline ~23.2 g/km per 0.01 L/100 km; diesel ~26.3 g/km), so the gross penalty headline that an OEM faces is fuel-mix-dependent. A maker with a 0.2 L/100 km shortfall across 600,000 units faces ~₹150 Cr in lower-band penalties (0.2 × 600,000 × ₹25,000 / 1L); above the threshold the per-litre rate doubles. The headline exposure is much smaller than a naive g/km read of the schedule would suggest — which is part of why the March 2026 recalculation produced a number more than 60% below the earlier estimate.
Enforcement — updated March 2026
Per a Ministry of Power presentation to the PMO (reported 30 March 2026), ₹2,728 Cr in CAFE-II fines have now been levied against nine OEMs covering FY23-FY25. The figure was recalculated down from an earlier ~₹7,800 Cr estimate. The revised methodology uses a flat ₹37.5 lakh per OEM as the standard charge for the April-December FY23 partial period, with the original EC Act Section 26 schedule applying for full-year shortfalls thereafter. A credit-debit registry is being set up by the designated authority. Enforcement is now real; the open question for CAFE-III is how aggressively MoRTH applies the schedule against the much larger absolute exposures we cover in Part 5.
India's CAFE design is closer to the EU model than the US model, but with its own twists.
| Jurisdiction | Design choice | India CAFE comparison |
|---|---|---|
| United States | Separate cars/trucks standards, miles-per-gallon basis, credit trading since 2010, generous off-cycle stack | India has not split cars from trucks — uses a single fleet CO2 basis like the EU |
| European Union | Stricter targets. Super-credits under Reg 2019/631 phased from 2.0× in 2020 to 1.0× from 2023, capped at 7.5 g CO2/km per-OEM cumulative over the 2020-2022 window. Strong off-cycle eco-innovation regime | India's CAFE-III super-credits at 3.0× are more generous than the EU's peak under Reg 2019/631; the phase-out trajectory is the policy risk to watch |
| China | Dual-credit system with a separate NEV mandate | India has not adopted a separate NEV mandate — super-credits inside CAFE do the same job |
The EU comparison is the most instructive. Under Regulation (EU) 2019/631 the BEV/PHEV super-credit was 2.0× in 2020, 1.67× in 2021, 1.33× in 2022, then 1.0× from 2023 onwards — with a 7.5 g CO2/km per-OEM cumulative cap over the 2020-2022 window. That trajectory treats BEVs as just BEVs in the denominator from 2023 onwards. India's draft 3.0× flat multiplier is therefore more generous than the EU's starting point ever was. That makes the EU phase-out the single most consequential policy precedent for India — if BEE haircuts the 3.0× multiplier mid-block, the entire CAFE-III credit market re-prices. Part 6 in this series models that scenario in full.
Bridge to Part 2
The 3.0× multiplier is the policy hinge for everything that follows. Part 2 walks through the full CAFE-III mechanics.
Read CAFE-III Mechanics →Part 2 walks through the CAFE-III step-change — the 105 to 78.9 g target curve, the WLTP transition adding 18% to ICE readings, super-credits, the 17 off-cycle technologies, and the new OEM-to-OEM credit market.
Part 2 — CAFE-III Mechanics · Part 3 — OEM Landscape · Part 6 — The Credit Market Modelled
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.