India Proposes Fuel Efficiency Credit Trading

The Indian government is contemplating a new proposal that could enable automakers to trade fuel efficiency compliance credits. Under this initiative, manufacturers that have surpassed their Corporate Average Fuel Efficiency (CAFE) Phase II targets between financial year 2023 and 2027 may sell their surplus credits to fellow companies that have fallen short of their targets. This potential credit-trading framework, similar to systems in Europe, the US, and China, aims to create a new revenue opportunity for leading companies.

The proposed system involves a 'credit-debit passbook' for each manufacturer. A positive balance signifies emissions below the regulatory limit, while a negative balance indicates exceeding it. Automakers must maintain a net positive balance to avoid penalties, which could be as high as ₹50,000 per non-compliant vehicle sold, in addition to a base penalty.

Top performers like Tata Motors Passenger Vehicles and Maruti Suzuki are expected to have substantial pools of tradable credits. Tata Motors PV, for instance, reportedly exceeded its CAFE targets by 10% in FY23 and up to 25% in FY26. Maruti Suzuki also showed consistent outperformance, exceeding targets by 2% in FY23 and 8% in FY25.

The proposal also introduces a unique provision allowing lagging automakers to purchase credits directly from the Bureau of Energy Efficiency (BEE) at a fixed price of ₹2,500 per CO₂ g/km. Compliance under CAFE 2 norms will be assessed across the entire FY23-FY27 period, allowing for annual shortfalls to be offset by better performance in other years. This direct purchase option from the regulator is not seen in global markets.

Several manufacturers, including Mahindra & Mahindra and Hyundai Motor India, have reportedly missed their targets in at least one financial year. The proposed credit trading system and CAFE 3 norms are both in the draft stage. Experts emphasize that the effectiveness of such credit trading hinges on sufficiently stringent regulatory targets, with strong standards forming the foundation of an effective compliance system.