EU's CBAM poses major compliance challenge for Indian MSMEs; Experts seek urgent government support

The European Union's Carbon Border Adjustment Mechanism (CBAM) entered its definitive (full compliance) phase on January 1, 2026, after a transitional report...

What Happened

The European Union's Carbon Border Adjustment Mechanism (CBAM) entered its definitive (full compliance) phase on January 1, 2026, after a transitional reporting-only phase from October 1, 2023 to December 31, 2025.
Indian Micro, Small and Medium Enterprises (MSMEs) exporting to the EU — particularly in iron and steel, aluminium, and fertilisers — face severe compliance challenges: mandatory carbon accounting, verified emission reporting, and purchase of CBAM certificates tied to the carbon price in the EU Emissions Trading System (ETS).
Experts have highlighted that MSMEs lack the financial capacity and technical infrastructure for carbon accounting and auditor certification, placing them at a competitive disadvantage relative to larger domestic and foreign exporters.
The Central Government is working on a scheme to bear 90% of CBAM compliance costs for MSMEs, and India's own Carbon Credit Trading Scheme (CCTS) is expected to commence trading by October 2026.

Static Topic Bridges

Carbon Border Adjustment Mechanism (CBAM) — Mechanism and Purpose

CBAM is a trade measure introduced by the European Union through Regulation (EU) 2023/956, adopted in May 2023. Its core purpose is to prevent carbon leakage — the phenomenon where EU industries relocate production to countries with weaker climate regulations to avoid the EU's carbon price, thereby shifting emissions rather than reducing them. Under CBAM, importers into the EU must purchase CBAM certificates corresponding to the embedded carbon emissions in their goods, priced in line with the EU Emissions Trading System (ETS) allowance price.

Legal basis: Regulation (EU) 2023/956 of the European Parliament and Council
Transitional phase: October 1, 2023 – December 31, 2025 (quarterly reporting only, no certificate purchase)
Definitive phase: From January 1, 2026 — importers must purchase and surrender CBAM certificates annually
Six sectors covered: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity
The EU ETS (cap-and-trade system) has been operating since 2005; CBAM is its border-equivalent for non-EU producers
Certificates are priced weekly based on the average EU ETS allowance auction price
By 2034, CBAM is expected to align with full phase-out of free EU ETS allowances

Connection to this news: Indian MSMEs exporting iron, steel, and aluminium to the EU must now quantify and report the exact greenhouse gas (GHG) emissions embedded in their products and purchase CBAM certificates — a process requiring accredited third-party auditors and digital reporting systems that most small units cannot afford.

India's Micro, Small and Medium Enterprises (MSME) Sector

MSMEs are defined under the MSME Development (Amendment) Act based on investment in plant and machinery and annual turnover thresholds (revised upward in 2020). They constitute the backbone of India's manufacturing and export ecosystem, contributing approximately 30% of GDP, 45% of exports, and over 110 million jobs.

MSME classification (post-2020 revision):
Micro: Investment ≤ ₹1 crore, Turnover ≤ ₹5 crore
Small: Investment ≤ ₹10 crore, Turnover ≤ ₹50 crore
Medium: Investment ≤ ₹50 crore, Turnover ≤ ₹250 crore
Nodal Ministry: Ministry of Micro, Small and Medium Enterprises
Key MSME schemes: MUDRA (Micro Units Development and Refinance Agency), SFURTI (Scheme of Fund for Regeneration of Traditional Industries), ZED (Zero Defect Zero Effect) certification
India's MSME exports to the EU include iron and steel products, aluminium castings, chemicals, and fertiliser raw materials — all CBAM-covered sectors

Connection to this news: The CBAM compliance cost — including accredited auditor fees, system upgrades for emission tracking, and certificate purchase — disproportionately burdens MSMEs that operate on thin margins and lack dedicated sustainability/compliance teams.

India's Carbon Credit Trading Scheme (CCTS) and Carbon Markets

The Ministry of Power notified the Carbon Credit Trading Scheme (CCTS), 2023 on June 28, 2023, under the Energy Conservation (Amendment) Act, 2022. The scheme establishes India's domestic carbon market, administered by the Bureau of Energy Efficiency (BEE) under the Ministry of Power, with the Central Electricity Regulatory Commission (CERC) as the trading regulator. The market has two components: a compliance mechanism (mandatory caps for designated industries) and a voluntary offset mechanism.

Legislative basis: Energy Conservation (Amendment) Act, 2022
Administered by: Bureau of Energy Efficiency (BEE), Ministry of Power
Trading regulator: Central Electricity Regulatory Commission (CERC)
Compliance market launch: expected by October 2026
Nine industrial sectors have been notified with emission intensity targets under CCTS
India's ICM (Indian Carbon Market) will allow industries to trade carbon credits domestically — entities that over-comply can sell credits to those that under-comply
A domestic carbon price via CCTS could serve as evidence of carbon cost paid, potentially offsetting CBAM obligations for Indian exporters

Connection to this news: A functioning Indian Carbon Market with verifiable domestic carbon pricing could allow Indian exporters to demonstrate that embedded emissions have already been priced — reducing or eliminating their CBAM certificate liability in the EU, which is why experts are urging faster rollout of the CCTS.

Carbon Leakage and WTO Compatibility of CBAM

Carbon leakage occurs when stringent domestic climate regulation causes industries to migrate to jurisdictions with lower or no carbon costs, effectively exporting emissions. CBAM aims to prevent this by levelling the carbon cost for imported goods. However, developing countries including India have questioned CBAM's WTO compatibility — arguing it could constitute a discriminatory trade barrier under GATT Article III (national treatment) or Article XX (environmental exceptions). India has flagged CBAM at WTO forums as a unilateral trade measure that violates the Common But Differentiated Responsibilities (CBDR) principle enshrined in the UNFCCC and the Paris Agreement.

GATT Article III: National treatment principle — imported goods must not be treated less favourably than domestic goods
GATT Article XX(b) and (g): Environmental exceptions — permit trade measures necessary to protect human health or conserve exhaustible natural resources
CBDR principle: Developed countries bear greater historical responsibility for emissions and must bear more of the mitigation burden
Paris Agreement (2015): Article 4 — Nationally Determined Contributions (NDCs) allow countries to set their own climate targets
India's position: CBAM is a "climate club" measure that disadvantages developing-country exporters who lack comparable carbon pricing infrastructure

Connection to this news: Indian MSME exporters are caught between the EU's legitimate climate objective (carbon leakage prevention) and India's developmental constraints — the government's 90% cost-bearing scheme for MSMEs is a stopgap while India negotiates both WTO pushback and accelerates its domestic carbon market.

Key Facts & Data

CBAM definitive phase start: January 1, 2026
CBAM transitional phase: October 1, 2023 – December 31, 2025
Sectors covered: 6 (iron and steel, aluminium, cement, fertilisers, hydrogen, electricity)
EU ETS operational since: 2005
CBAM legal basis: EU Regulation 2023/956
India's CCTS notified: June 28, 2023 under Energy Conservation (Amendment) Act, 2022
BEE administers CCTS; CERC regulates trading
Indian Carbon Market (compliance) launch: expected October 2026
Government scheme: 90% of CBAM compliance costs to be borne by government for MSMEs
MSME sector's share: ~30% of GDP, ~45% of exports, ~110 million jobs
MSME investment/turnover thresholds revised: 2020