EU's Carbon Border Tax (CBAM) Is Now in Force: Why Indian Steel MSMEs Feel the Pressure
The European Union's Carbon Border Adjustment Mechanism (CBAM) entered its definitive (paying) phase on 1 January 2026, after a reporting-only phase that ran from October 2023. EU importers will buy CBAM certificates for 2026 imports from February 2027, and the first annual declarations are due by 30 September 2027.
Small Indian steel makers (MSMEs, or micro, small and medium enterprises) report fewer orders from Europe. Some small European buyers have stopped ordering, and others have asked to delay orders until the rules become clear.
Many MSMEs struggle to collect emissions data (for example, from their electricity supplier) and to pay for checking and certifying it. One Kolkata exporter estimates compliance could cost Rs 5 to 10 million.
India was the EU's largest supplier of iron and steel in 2024 (about €3.9 billion of imports, as per Eurostat). Indian steel and aluminium exports to the EU fell 24.4% in 2024-25, even before CBAM payments began.
India argues that such climate trade measures must respect the principle of common but differentiated responsibilities and has raised the issue at the WTO (World Trade Organization). The India-EU Free Trade Agreement (negotiations concluded on 27 January 2026, not yet signed) does not exempt Indian goods from CBAM, but provides for consultations and technical cooperation.
On the EU side, the Council agreed in June 2026 to extend CBAM to some downstream goods (products made from steel and aluminium), and the European Parliament voted in September 2026 against an "emergency brake" that would have allowed the charge to be paused.
Carbon Border Adjustment Mechanism (CBAM): The EU's Carbon Charge on Imports
CBAM is a European Union rule that charges importers for the carbon dioxide released while making certain goods abroad. The idea is simple: a factory in the EU already pays for its pollution under the EU's carbon market, so an imported product should pay a similar price at the border. The importer in Europe must buy "CBAM certificates" equal to the emissions in the goods it brings in. The price of these certificates follows the price of carbon permits in the EU carbon market.
CBAM's paying phase started in 2026, so European buyers now need verified emissions data and face a carbon bill for every tonne of Indian steel. This is why small Indian exporters report fewer and delayed orders. Since India's steel is mostly coal-based, its emissions per tonne are higher than the global average, which raises the CBAM cost per tonne.
EU Emissions Trading System (EU ETS)
The EU Emissions Trading System is Europe's carbon market. It puts a total limit (a "cap") on the greenhouse gases that big polluters such as power plants, steel mills and cement factories can release. Each company must hold one permit, called an allowance, for every tonne of carbon dioxide it emits. Companies that pollute less can sell their spare allowances to those that pollute more. This system is called "cap and trade".
CBAM exists because the EU ETS makes European producers pay for carbon. As free allowances shrink, the EU wants importers to pay the same carbon price, so the pressure on Indian exporters will grow each year until 2034.
Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC)
CBDR-RC is a basic principle of international climate law. It says that every country must help protect the climate, but not equally. Rich countries that released most of the past emissions, and that have more money and technology, must do more. Developing countries like India have the right to grow and lift people out of poverty while they cut emissions.
India's main diplomatic argument against CBAM rests on CBDR-RC. India says that charging a developing country's small firms the same carbon price as European firms ignores their different history of emissions and their lower capacity to pay.
MSME Sector: Definition, Classification, and Economic Significance
Micro, Small and Medium Enterprises (MSMEs) are small businesses, such as a small steel fabrication unit, an auto-parts workshop or a garment unit. India classifies them by two tests together: how much they have invested in plant and machinery, and their yearly sales (turnover). They create a very large number of jobs and contribute a big share of India's exports.
The firms that are losing European orders are mostly MSMEs. They have the least capacity to measure and prove their emissions, so CBAM hits them harder than large steel companies, which can invest in electric arc furnaces, renewable power and data systems.
- CBAM transitional (reporting) phase: October 2023 to December 2025; definitive phase from 1 January 2026
- CBAM certificate sales for 2026 imports: from February 2027; first annual declaration due 30 September 2027
- CBAM goods: iron and steel, aluminium, cement, fertilisers, electricity, hydrogen
- De minimis exemption: below 50 tonnes of CBAM goods per importer per year
- EU iron and steel imports from India in 2024: €3.9 billion (India the largest supplier), up 89.2% between 2019 and 2024
- India's finished steel exports to the EU: 4.03 million tonnes in 2023-24, up from 1.95 million tonnes in 2019-20
- Indian steel and aluminium exports to the EU fell 24.4% in 2024-25
- Indian steel's carbon intensity: about 2.55 tonnes of CO2 per tonne of steel, against a global average of about 1.85; coal-based routes make up over 80% of output
- ICRIER (June 2026) estimate: at a carbon price of about $86 per tonne of CO2, Indian iron and steel exports to the EU could fall by about 24%
- EU proposal: 75% of CBAM revenue to the EU budget (2028–2034) and 25% to a Temporary Decarbonisation Fund
- India-EU FTA negotiations concluded on 27 January 2026; the FTA does not exempt Indian exports from CBAM
- EU ETS started in 2005; free allowances phased out between 2026 and 2034
- MSME limits from 1 April 2025: micro ₹2.5 crore / ₹10 crore; small ₹25 crore / ₹100 crore; medium ₹125 crore / ₹500 crore (investment / turnover)