EU carbon tax: Government to shoulder 90 per cent compliance bill of MSMEs

The Union government has committed to bearing 90 per cent of the compliance costs that MSMEs face under the European Union's Carbon Border Adjustment Mechani...

What Happened

The Union government has committed to bearing 90 per cent of the compliance costs that MSMEs face under the European Union's Carbon Border Adjustment Mechanism (CBAM), which entered its definitive (full enforcement) phase on 1 January 2026.
Indian MSMEs exporting steel, aluminium, and related products to the EU must now certify and report the embedded carbon emissions in their goods or their EU importers will pay for CBAM certificates at prevailing EU carbon prices.
MSMEs face disproportionate compliance burdens — a small manufacturer may spend more on certified carbon auditors than the actual carbon tax owed — making government support critical for export competitiveness.
The government's support is intended to cover monitoring, reporting, and verification (MRV) costs, which include third-party carbon audits, digital reporting infrastructure, and capacity-building for cluster-level decarbonisation.
Industry federations have additionally sought access to green (renewable) electricity for export-oriented MSME clusters, since grid power in India remains predominantly coal-based thermal generation — directly contributing to high embedded carbon levels.

Static Topic Bridges

Carbon Border Adjustment Mechanism (CBAM)

CBAM is a landmark EU climate trade instrument, formally enacted as EU Regulation 2023/956, designed to prevent "carbon leakage" — the phenomenon where EU manufacturers are undercut by imports from jurisdictions with weaker or no carbon pricing. It requires EU importers to purchase CBAM certificates equivalent to the carbon price that would have been paid had the goods been produced under the EU Emissions Trading System (ETS).

Transitional phase: 1 October 2023 to 31 December 2025 (reporting obligations only, no payments).
Definitive phase: from 1 January 2026 (financial obligations apply — importers must buy CBAM certificates).
Covered sectors (initial): Cement, Iron and steel, Aluminium, Fertilisers, Electricity, and Hydrogen.
Carbon leakage is the central economic concern CBAM addresses: if EU producers pay a carbon price but competitors in third countries do not, production shifts offshore without any global emissions reduction.
India's steel exports to the EU face default CBAM obligations as high as €293 per metric ton in 2026.
India supplied approximately 15% of hot-rolled steel products imported into the EU in 2024.

Connection to this news: The government's 90% cost-bearing commitment is a direct fiscal response to ensure CBAM does not make Indian MSME exports unviable. Without support, smaller manufacturers — the backbone of India's secondary steel and aluminium sectors — face a compliance cost cliff.

EU Emissions Trading System (EU ETS) and Carbon Pricing

The EU ETS is a cap-and-trade carbon market that sets a ceiling on aggregate greenhouse gas emissions from covered industries and allows companies to buy and sell emission allowances. CBAM is calibrated to mirror the EU ETS carbon price so that non-EU producers face equivalent carbon costs.

EU ETS, launched in 2005, covers power generation, heavy industry, and aviation within the EU.
Cap is progressively reduced each year, driving the carbon price upward over time.
The principle underpinning CBAM is "equivalent carbon cost" — ensuring that imports do not gain an unfair competitive advantage over EU goods that face ETS compliance costs.
India does not yet have a comparable domestic carbon market, though the Carbon Credit Trading Scheme (CCTS) notified in 2023 lays the groundwork for a national carbon market, which could eventually allow CBAM deductions for carbon priced domestically.

Connection to this news: If India establishes a credible domestic carbon price through CCTS, CBAM liabilities for Indian exporters could be reduced by the domestic carbon cost already paid — keeping revenue within India's fiscal system rather than flowing to EU coffers.

Monitoring, Reporting, and Verification (MRV) Framework

MRV is the technical backbone of any carbon compliance regime. Exporters must measure their production-stage carbon emissions using an approved methodology, report these accurately, and have the data verified by an accredited third-party auditor.

EU CBAM requires exporters to align with EU carbon accounting methodologies, which differ from informal or national standards.
A nationally consistent MRV framework is critical for India to avoid exporters being assessed at unfavourable EU default emission values.
The Bureau of Energy Efficiency (BEE) and the Ministry of Environment, Forest and Climate Change (MoEFCC) are the nodal bodies developing India's MRV infrastructure under the CCTS.

Connection to this news: The government's 90% compliance subsidy is operationally delivered through MRV support — subsidised auditing services, digital carbon-footprint calculation tools, and cluster-level emission reporting assistance for MSME exporters.

Key Facts & Data

CBAM full name: Carbon Border Adjustment Mechanism; EU Regulation 2023/956.
Definitive phase start: 1 January 2026.
Sectors covered: Cement, Iron and Steel, Aluminium, Fertilisers, Electricity, Hydrogen.
India's exposure: India supplied ~15% of EU hot-rolled steel imports; CBAM cost up to €293/metric ton in 2026.
MSME sector exposure: ~one-third of Indian steel exports in downstream products are MSME-dominated.
Government commitment: 90% of compliance (MRV/audit) costs for MSMEs to be borne by the government.
India's domestic carbon framework: Carbon Credit Trading Scheme (CCTS), 2023 — anchors a national carbon price; nodal body: Bureau of Energy Efficiency (BEE).
EU ETS: operational since 2005; CBAM is calibrated to mirror the ETS price.
Green power demand: MSME clusters are seeking access to renewable electricity to lower embedded carbon and reduce CBAM liability.
EU support: EU-India Policy Dialogue Support Facility (PDSF) funding decarbonisation technologies for Indian MSMEs.