First notified by the government in 2017 under the Energy Conservation Act, 2001, Corporate Average Fuel Efficiency (CAFE) norms were introduced to reduce fuel consumption and carbon dioxide emissions, with the broader aim of lowering oil dependency and air pollution.
The norms apply to petrol, diesel, liquefied petroleum gas (LPG), CNG, hybrid and electric passenger vehicles with a gross vehicle weight (GVW) of less than 3,500 kg.
CAFE norms link a manufacturer's corporate average fuel consumption, measured in litres of gasoline equivalent per 100 km, to the corporate average kerb weight of all eligible cars sold by an original equipment manufacturer (OEM) in a financial year.
The corporate average fuel consumption is calculated by averaging the standard fuel consumption of all eligible vehicles sold by a manufacturer during the year. Fuel consumption is measured under standard conditions in nationally accredited laboratories.
The norms also prescribe limits on the average CO2 emissions of a manufacturer's fleet, as CO2 emissions are directly linked to fuel consumption.
The standards were introduced in two phases. CAFE Stage I came into effect in 2017-18, while Stage II was implemented from 2022-23.
The third phase of CAFE norms was notified on Tuesday and will apply to passenger vehicles from April 1, 2027, to March 31, 2032.
The new framework provides greater regulatory clarity and a stable policy environment for the automobile industry while encouraging technological innovation and improving energy efficiency, the Ministry of Power said.
The norms were finalised after consultations with automobile manufacturers, industry associations, academia and other stakeholders. The government said the framework is designed to be technology-neutral and flexible while encouraging cleaner technologies, alternative fuels and other innovations.
The framework aims to drive continuous improvements in fuel efficiency, reduce fuel consumption and support India's energy security and sustainability goals.
Small-volume manufacturers with annual eligible vehicle volumes below 1,000 units are exempt from meeting the specific CAFE target.
Under the notified norms, the fleet-average fuel-consumption target will become progressively lower each year.
The target will be calculated using the formula a × (W − 1,229) + c, where W represents the weighted average unladen mass of all eligible vehicles manufactured or imported for sale by an OEM.
In the formula, a is the weight adjustment factor and c is the baseline fuel-consumption target. The weight adjustment factor, or slope, determines how much the target changes depending on how a manufacturer's average vehicle weight differs from the reference weight.
Under CAFE III, the slope will progressively decline from 0.00158 in FY28 to 0.00131 in FY32.
For a manufacturer with a reference fleet weight of 1,229 kg, the target will fall from 3.996 litres of petrol equivalent per 100 km in FY28 to 3.3273 litres per 100 km in FY32. This translates to approximately 94.8g of CO2/km in FY28 and 78.9g/km in FY32.
The targets apply to a manufacturer's eligible fleet as a whole. This means more efficient vehicles can offset higher-consuming models within the same portfolio.
The final CAFE III framework provides relatively greater relief to manufacturers with lighter vehicle fleets, but does so through a change in the target formula rather than a separate concession for small cars.
The September 2025 draft had proposed a 3g/km relaxation for cars weighing less than 909 kg. This had triggered a debate within the industry, with some manufacturers, including Tata Motors and Mahindra & Mahindra, arguing that the concession would primarily benefit Maruti Suzuki, which has more than 95 per cent of the market for vehicles in that weight category.
The final notification has removed the proposed special 3g/km concession for small cars.
Instead, the government has changed the slope of the CAFE target curve, raised the reference vehicle weight and increased the baseline fuel-consumption constants. The reference weight has been increased to 1,229 kg from 1,170 kg.
The flatter target curve provides relatively greater relief to lighter vehicles. As a result, manufacturers with a larger proportion of small cars are expected to find compliance easier under the final framework.
For instance, a small car that would have faced a target of 54.1g CO2/km after the proposed 3g/km relaxation under the September 2025 draft would face a target of 63.7g CO2/km under the final framework, without the separate concession.
CAFE III introduces a credit-debit mechanism to give manufacturers greater flexibility in meeting their targets.
Manufacturers whose fleet performance exceeds the prescribed target will earn credits, while those falling short will accumulate debits.
Carmakers with a deficit can buy credits from the Bureau of Energy Efficiency (BEE). The buyout price will start at ₹2,500 per gram of CO2/km in FY28 and increase by ₹500 every year to ₹4,500 in FY32.
Manufacturers with surplus credits can also trade them with other manufacturers on mutually agreed terms.
The five-year CAFE III period will be divided into two compliance blocks: FY28-FY30 and FY31-FY32.
Credits and debits can be carried forward within each block, but unused credits will lapse at the end of the respective block.
The final notification retains a super-credit mechanism that gives additional compliance value to vehicles using cleaner technologies.
Battery electric vehicles (BEVs) and range-extended electric vehicles get a volume derogation factor of 3, meaning one such vehicle can be counted as three vehicles while calculating fleet performance.
Plug-in hybrid electric vehicles and strong hybrid electric vehicles running on flex-fuel ethanol get a factor of 2.5.
Strong hybrid electric vehicles get a factor of 1.6, while flex-fuel ethanol vehicles get a factor of 1.1.
The framework also provides carbon-neutrality factors for certain fuels. Vehicles running on petrol blended with 20 per cent or more ethanol (E20), including strong and plug-in hybrids, get an 8 per cent factor, while flex-fuel ethanol vehicles get a 22.3 per cent factor.
Manufacturers can also claim a 1g CO2/km reduction for each eligible efficiency technology, subject to a maximum benefit of 9g CO2/km.
The 12 eligible technologies include start-stop systems, tyre-pressure monitoring systems, regenerative braking, six-speed or higher transmissions, efficient alternators, motor-generators, LED exterior lighting, advanced glazing, electric water pumps and high-efficiency air-conditioning systems.
According to an April 2026 report by ForeSee Advisors, based on the Ministry of Power's CAFE 2027 Draft Notification of April 8, 2026, CAFE III could increase vehicle prices by ₹20,000 to ₹1.25 lakh, while adding ₹18,000 to ₹1.10 lakh to OEM costs.
Entry-level cars could see price increases of ₹20,000-₹35,000 as manufacturers add technologies such as idle start-stop systems, tyre-pressure monitoring systems (TPMS), low rolling-resistance tyres and engine optimisation.
As compliance requirements become stricter, OEMs may have to adopt more advanced technologies, including six-speed transmissions, improved aerodynamics, advanced glazing or solar glass and, eventually, 48V mild-hybrid systems, particularly in larger vehicles.
According to ForeSee, these additions could push costs up by ₹85,000-₹1.25 lakh by FY32.
However, the report argues that higher upfront prices could be offset by fuel savings over time.
“While CAFE 2027 will raise vehicle prices in the near term, the Total Cost of Ownership (TCO) argument demonstrates a net consumer benefit within 2–3 years. A vehicle consuming 3.0 L/100 km instead of 4.2 L/100 km saves approximately ₹15,840/year in fuel at ₹110/litre over 12,000 km/year — recovering a ₹1 lakh FY32 price premium in under 7 years, and delivering a net saving of ₹1.5–2.0 lakh over the vehicle's 15-year life,” ForeSee said in its report.
Industry experts and brokerages differ in their assessment of which automakers are best positioned for the transition.
Global brokerage firm Citi considers the new framework more stringent than the earlier CAFE-I and CAFE-II regimes, but views the clarity provided by the final rules as positive for the sector.
In the passenger vehicle segment, Citi's preferred order is Maruti Suzuki, Mahindra & Mahindra and Hyundai, while it has a Sell rating on Tata Motors' passenger vehicle business (TMPV).
Bank of America (BofA) Securities, meanwhile, believes the final CAFE III norms favour electric vehicles, although the concessions and compliance flexibility could soften the transition requirements.
Based on current emissions, BofA considers Tata Motors and Maruti Suzuki best placed to meet the norms, while Mahindra & Mahindra and Hyundai are expected to get some respite because of their relatively lower compliance requirements.