Tata Motors PV Flags Concern Over Proposed Direct Credit Buys From BEE in CAFE II Shifts

Tata Motors Passenger Vehicles is understood to have raised concerns over the government's proposal to allow automobile manufacturers to buy cheaper credits directly from Bureau of Energy Efficiency, as envisaged in the draft amendment to the CAFE II notification, stating it could dilute the integrity of the CAFE framework, according to sources.

In a letter to Secretary, Ministry of Power after the ministry issued draft notification earlier this month for a proposed amendment to the CAFE II (Corporate Average Fuel Efficiency) notification, the company also insisted that the government must not let the BEE 'originate or sell credits' in its own capacity as envisaged in the draft amendment.

The CAFE II norm, which mandates automakers to produce more fuel-efficient and lower-emitting vehicles, is in force from FY23 to FY27.

The company has drawn attention of the government to a provision of the proposed amendment that "allows manufacturers with debit balances to purchase credits directly from Bureau of Energy Efficiency (BEE) at an administered price of ₹2,500 per g CO2/km", and asked it to be deleted.

"This provision effectively provides a compliance option to an OEM at a cost lower than the statutory penalty which is approximately ₹5,000 per g CO2/km under the Energy Conservation Act, 2001," a source said citing the letter.

If credits are available from BEE at ₹2,500 per g CO2/km in unlimited quantities, an OEM can make a straightforward commercial calculation. If the cost of modifying products, improving fuel efficiency, changing technology or otherwise achieving compliance is higher than ₹2,500 per g CO2/km, it becomes cheaper to buy the credit than to comply, the company is understood to have pointed out in the letter.

"That outcome would run contrary to the purpose of a technology-driving regulation such as the CAFE regime," it wrote.

If credits can be created by BEE merely against payment, without any corresponding improvement in emission, such credits would not have the same character. They would effectively be accounting entries used to extinguish debits arising as a result of non-compliance. They would not represent any environmental or fuel efficiency gain, it argued.

"That would dilute the integrity of the CAFE framework," the company wrote.

Maintaining that BEE should act as a neutral administrator, verifier and facilitator of the credit-debit mechanism, the company is also understood to have highlighted that "BEE should administer the market, not sell into it".

The company argued that allowing "manufacturers with debit balances to purchase credits directly from BEE at an administered price of ₹2,500 per g CO2/km" raises a fundamental design concern that is institutional and structural in nature.

"If BEE itself supplies credits, it would become, at the same time, the regulator, the market administrator, the price-setter and a counterparty in the very market that it supervises. Even if unintended, such a structure may affect price discovery, depress the value of genuine manufacturer-generated credits, and create uncertainty about the neutrality of the market architecture," the letter pointed out.

The company also pointed out that credits should arise only from verified over-compliance by OEMs, calculated in accordance with the notified methodology and duly recorded in the passbook.

The company also pointed out that "credits earned through verified over-compliance should not lapse merely because they are not purchased within the FY2022-23 to FY2026-27 compliance block".

Credits earned through verified over-compliance should be capable of carry-forward into subsequent compliance blocks, subject to safeguards, it added.