Tata Motors Passenger Vehicles has urged the government to revise the proposed changes to India's Corporate Average Fuel Efficiency (CAFE) regulations, stating that the draft framework could weaken the compliance system if the Bureau of Energy Efficiency (BEE) is permitted to sell carbon credits directly to automakers.

According to sources, the automaker has submitted a letter to the Ministry of Power. In the letter, the company expressed support for the government's proposal to introduce a credit-debit mechanism under the CAFE regime but called for modifications to the framework.

The draft proposal states that manufacturers failing to meet fuel efficiency targets would be allowed to purchase compliance credits from the BEE at a fixed price of Rs. 2,500 (US$ 26) per gram of CO2 per kilometre.

Tata Motors stated that this arrangement would create a conflict of interest, as the BEE would simultaneously act as the regulator, market administrator, price setter and seller of credits.

"A credit market can command confidence only if the regulator remains visibly neutral," the company stated, adding that the BEE should verify, record and administer credits but should not participate in the market as a seller. "Credits should represent actual, measurable and verified overcompliance, and should not be created administratively in unlimited quantities merely upon payment."

Instead, Tata Motors proposed that the BEE facilitate trading between manufacturers that generate surplus credits by exceeding emission targets and those that fail to meet them. The company stated that such a mechanism would enable market-based price discovery and allow credits generated through overcompliance to be traded.

The automaker also stated that compliance credits should originate only from verified overcompliance by manufacturers and should not be created solely through payments made to the regulator.

The company further stated that credits not backed by actual reductions in fuel consumption or emissions would reduce the environmental impact associated with the system.

Tata Motors also stated that the proposed credit price of Rs. 2,500 is lower than the statutory penalty for non-compliance under the Energy Conservation Act, which it estimated at approximately Rs. 5,000 per gram of CO2 per kilometre.

According to the company, this could make the purchase of credits less costly than investing in the technologies required to meet fuel efficiency standards.

"If the cost of improving products or technologies exceeds the proposed credit price, manufacturers may choose to buy credits instead of complying," the company said, adding that such an outcome would alter the intended function of the CAFE framework.

The company recommended that manufacturers should first be allowed to purchase credits generated by automakers that exceed compliance requirements. If such credits are unavailable, any remaining compliance shortfall should attract the statutory penalty rather than be addressed through regulator-issued credits.

Tata Motors also urged the government to allow unused compliance credits earned through verified overcompliance to be carried forward into future CAFE compliance periods, stating that such a provision would provide manufacturers with an additional mechanism for managing compliance requirements.

The Ministry of Power, in consultation with the Bureau of Energy Efficiency (BEE), recently issued a draft amendment notification for the Corporate Average Fuel Efficiency (CAFE) Phase II norms. The ministry has invited stakeholders to submit comments on the proposed amendments to the notification.