The Centre is developing a scheme to cover 90% of compliance costs that micro, small and medium enterprises (MSMEs) will incur under the European Union's Carbon Border Adjustment Mechanism (CBAM), according to reports from The Indian Express. This initiative aims to cushion the impact of the EU's carbon tax on smaller exporters, as India's efforts to secure concessions for small industries during trade negotiations with developed countries did not succeed. The policy will be effective from January 2026, providing crucial protection as Indian exporters face the disproportionate burden of embedded emissions reporting and default value mark-ups that could otherwise make EU markets commercially unviable for Indian MSMEs.
The tax concern is no longer limited to the EU, as the United Kingdom has already confirmed its own carbon border tax, which comes into effect from January 1, 2027. Countries such as Australia, Canada and the United States are considering similar border carbon measures, according to Business Standard. As carbon border taxes gain traction globally, they are set to reshape the way countries trade, particularly for carbon-intensive exports. The Foreign Pollution Fee Act (FPFA) has been introduced by US lawmakers, aimed at imposing tariffs on imported products manufactured in countries with higher carbon intensities than US baselines.
Under CBAM, Indian exporters are required to submit certificates corresponding to the embedded emissions in their goods, creating significant barriers for MSMEs. As reported by The Indian Express, citing people aware of the development, the EU mandates default values for emissions data when actual figures cannot be provided, and these default values, along with associated mark-ups, are set to rise sharply by 10% in 2026, 20% in 2027 and 30% from 2028 according to the regulation. The compliance cost for MSMEs is estimated at ₹15-20 lakh per M of goods exported, highlighting the substantial financial burden these smaller enterprises face under the new mechanism.
According to the report, the principal challenge for MSMEs under CBAM is not the carbon levy itself but the cost of compliance. As quoted by The Indian Express, Ayush Mehrotra, partner at Khaitan & Co, explained that unlike large corporates, MSMEs often lack the technical expertise, systems and financial resources to measure, verify and report embedded emissions in accordance with CBAM requirements. MSMEs may have to incur significant upfront expenditure on carbon accounting, third-party verification, digital reporting systems and capacity building, making compliance a major operational challenge for smaller exporters.
An Indian Council for Research on International Economic Relations (ICRIER) working paper found that imports from India would decline for all CBAM commodities, and is likely to be felt the most by the iron and steel (I&S) sector. Government data showed that India's iron and steel exports to the EU declined 13% in the four months through April following the rollout of CBAM, according to Business Standard. The ICRIER working paper projects a 24% decline in India's iron & steel exports to EU due to CBAM implementation, with fertilisers and aluminium products also expected to be significantly affected. The EU is India's third-largest trading partner, with trade in goods worth €118 billion in 2025, accounting for 11.1% of India's total trade.
