The CBAM Compliance Burden – How Indian SMEs Can Survive the EU Carbon Border Tax
Introduction: The SME CBAM Crisis
The Carbon Border Adjustment Mechanism (CBAM) is the European Union’s carbon tariff on imports. It came into effect on January 1, 2026 , shifting from a reporting-only framework to a payment-linked regime. For India’s micro, small, and medium enterprises (MSMEs), this transition represents an existential threat to their export businesses.
The numbers are sobering. India’s steel and aluminium exports to the European Union fell 24.4% in FY 2025 , dropping from $7.71 billion in FY2024 to $5.82 billion — with steel bearing the brunt of the decline at 35.1% . This decline occurred before any CBAM financial obligation had taken effect.
Unlike large corporations with dedicated sustainability teams and robust data systems, MSMEs often lack the technical expertise, systems, and financial resources to measure, verify, and report embedded emissions in accordance with CBAM requirements. Compliance with CBAM alone could cost an MSME unit between ₹15 lakh and ₹20 lakh annually.
The government is responding. The India-EU Free Trade Agreement includes a dedicated CBAM annexure with provisions to ease compliance for smaller exporters. But time is running out. This guide provides a comprehensive analysis of the MSME CBAM challenge and a survival strategy for Indian exporters.
What Is CBAM and How Does It Work?
What Is CBAM?
The Carbon Border Adjustment Mechanism is the European Union’s carbon tariff on imported carbon-intensive goods. It encourages cleaner industrial production in non-EU countries, ensuring imported products face the same carbon costs as goods produced within the EU.
Why CBAM Exists
The new measures aim to close loopholes and ensure that the EU’s climate goals are not undermined by “carbon leakage” — when carbon-intensive production moves to countries with less strict climate policy.
How It Works
| Step | Description |
|---|---|
| 1. Declaration | Importers must declare the embedded emissions of their imports |
| 2. Certificate Purchase | Importers purchase CBAM certificates to cover these emissions |
| 3. Deduction | If a carbon price has already been paid in the country of origin, it can be deducted |
| 4. Compliance | Importers must submit annual reports and compliance declarations |
The CBAM Transition
| Phase | Period | Requirement |
|---|---|---|
| Transitional | October 2023 – December 2025 | Reporting only, no payment |
| Definitive | January 1, 2026 | Payment phase begins |
Sectors Covered
CBAM currently covers six sectors: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity. The sectors facing the sharpest exposure right now are steel and aluminium.
The Scale of the Challenge: 24.4% Export Decline
The Data
| Metric | Value |
|---|---|
| Combined steel and aluminium exports (FY2024) | $7.71 billion |
| Combined steel and aluminium exports (FY2025) | $5.82 billion |
| Combined decline | 24.4% |
| Steel decline | 35.1% |
What These Numbers Mean
- 24.4% decline occurred before any CBAM financial obligation had taken effect
- European buyers are already reorienting toward lower-emission producers
- The financial impact of CBAM has not even begun to bite
- The decline will intensify as CBAM costs are fully applied
The CBAM Tax Burden
According to GTRI, although the CBAM levy will technically be paid by EU importers, the financial burden will effectively be transferred to Indian suppliers through tougher price negotiations, stricter sourcing norms, and reduced margins. ICRA estimates that CBAM could negatively affect 15–40% of the steel India exports to the EU between 2026 and 2034 if carbon intensity isn’t reduced.
The Price Impact
There is an anticipated 16–22% decrease in realised prices for Indian steel and aluminium. For example, steel produced via the Blast Furnace-Basic Oxygen Furnace (BF-BOF) method generates about 2.4 tonnes of CO₂ per tonne, leading to a CBAM cost of roughly $192 per tonne. CBAM taxes are likely to be $50–140 per tonne between 2026 and 2034 , which would be 2–6% of current aluminium prices.
The CBAM Cost Structure: The Numbers
The CBAM Certificate Price
The first quarterly price for CBAM certificates was set at EUR 75.36 per tonne of CO₂ equivalent for Q1 2026. The second quarter price was set at €75.28 per tonne for Q2 2026.
Sector-Specific Costs
| Sector | CBAM Cost | Impact |
|---|---|---|
| Steel (BF-BOF) | ~$192 per tonne | 16-22% price reduction |
| Aluminium | $50-140 per tonne | 2-6% of current prices |
| Steel exports affected | 15-40% | Between 2026 and 2034 |
The Price Reduction Requirement
To remain viable in the EU market, many exporters may have to absorb price cuts of 15–22% .
The MSME Data Gap: A Critical Vulnerability
The Fundamental Problem
The fundamental problem is the supply chain data gap, and it hits MSMEs disproportionately hard. CBAM requires plant-level, verified emissions data from every part of the production chain, not just the exporter’s own facility.
Why MSMEs Can’t Provide Actual Data
| Reason | Explanation |
|---|---|
| No access to supplier data | Large producers often do not share plant-level emissions data with MSMEs that source steel or aluminium from them |
| No verification capacity | MSMEs cannot afford third-party verification agencies |
| No digital reporting systems | Lack of carbon accounting software and trained personnel |
| No technical expertise | Cannot calculate embedded emissions accurately |
The Default Values Risk
If exporters are unable to provide actual data, importers must use default values provided by the European Commission. These default values are set at the highest benchmarks and can sharply inflate carbon costs even when actual emissions are lower.
This gap risks hitting MSMEs harder than larger players and could push many of them out of EU supply chains unless corrective steps are taken.
The Verification Challenge
From 2026, independent verification of emissions will be mandatory, with audits required to be conducted by EU-recognised or ISO 14065–compliant verifiers. The process is expected to be rigorous, akin to a financial audit.
The India-EU FTA CBAM Annexure: A Lifeline for SMEs
What Is the CBAM Annexure?
The India-European Union Free Trade Agreement (FTA) includes a dedicated annexure on CBAM. The annexure is built around multiple pillars aimed at reducing compliance burdens for Indian exporters.
The FTA Context
The FTA was concluded in late January 2026. The agreement is expected to be signed later this year, with implementation likely in 2027.
Key Provisions
| Provision | Description |
|---|---|
| Dedicated work plan | Comprehensive framework to help India navigate the EU’s carbon tax regime |
| SME support | Provisions to ease compliance for small and medium enterprises |
| Carbon price recognition | Framework for recognising carbon prices paid domestically |
| Verification support | Help with measuring embedded carbon and getting it verified |
The Official’s Perspective
Additional Secretary in the Department of Commerce Darpan Jain stated: “CBAM compliances are a concern among SMEs in terms of verification, determining the value of embedded carbon and ensuring that verifiers are recognised by EU authorities. There are separate provisions under the agreement to address these issues.”
“I am very hopeful that SMEs will not face any problems,” he added.
The Four Pillars of the CBAM Annexure
Additional Secretary Darpan Jain outlined the key pillars of the CBAM annexure:
Pillar 1: Flexibility
| Aspect | Description |
|---|---|
| What It Means | In case of flexibility in future, that would be available to India |
| Why It Matters | Ensures India is not locked into rigid compliance requirements |
Pillar 2: SME Compliance
| Aspect | Description |
|---|---|
| What It Means | Help Indian SMEs meet compliance requirements |
| Why It Matters | SMEs face disproportionate compliance burdens |
Pillar 3: Verification
| Aspect | Description |
|---|---|
| What It Means | Provisions for verification and recognition of verifiers |
| Why It Matters | Currently, EU authorities may not recognise Indian verifiers |
Pillar 4: Carbon Price Offset
| Aspect | Description |
|---|---|
| What It Means | Engage with EU authorities on taking into account the carbon price paid in India |
| Why It Matters | Carbon prices paid in India could be offset against CBAM liabilities |
The Carbon Price Offset Mechanism
“As you know, India is also developing its own carbon pricing mechanism. So, how to offset what is paid in India from what is paid in Europe is also part of the discussions,” Jain said.
The CBAM Work Plan: What It Covers
What Is the Work Plan?
The CBAM annexure includes a comprehensive work plan to help India navigate the EU’s carbon tax regime.
Key Elements
| Element | Description |
|---|---|
| Verification processes | Support for exporters in meeting EU verification requirements |
| Embedded carbon calculation | Guidance on accurate emissions calculation |
| Engagement with EU authorities | Ease compliance for smaller exporters |
| SME support | Special provisions to protect small and medium enterprises |
What This Means for SMEs
The work plan provides:
- A clear roadmap for addressing CBAM concerns
- Technical support for Indian exporters
- A framework for ongoing cooperation
- Recognition of Indian verifiers
India’s Carbon Pricing Mechanism: The CCTS Connection
The CCTS Framework
India’s Carbon Credit Trading Scheme (CCTS) is the country’s domestic carbon market. It covers approximately 490 obligated entities across seven energy-intensive sectors, with emissions coverage of approximately 477 million tCO₂e.
The CCTS-CBAM Connection
| Aspect | Connection |
|---|---|
| Carbon price | CCTS creates a domestic carbon price |
| CBAM deduction | Carbon prices paid through CCTS could be deducted from CBAM liabilities |
| Export competitiveness | CCTS compliance could reduce CBAM costs for exporters |
What Exporters Must Do
| Action | Why It Matters |
|---|---|
| Participate in CCTS | Demonstrate carbon compliance to EU buyers |
| Document compliance | Maintain records for CBAM declarations |
| Procure credits | Buy CCCs to demonstrate carbon reduction |
| Engage with FTA provisions | Leverage the CBAM annexure |
The EU Recognition Question
Discussions are also underway on India’s emerging carbon pricing framework to ensure that domestic carbon costs can potentially be offset against CBAM liabilities in Europe.
The SME Support Package: Government and Industry Initiatives
The Government’s Role
The government is preparing an extensive outreach programme to help businesses understand and benefit from the FTA once it comes into force. The commerce ministry plans to conduct outreach programmes in all districts to tell industry about what is in the FTA and how they can use it.
Industry Associations
Industry associations such as FICCI, CII, and ASSOCHAM are working to:
- Build awareness about CBAM requirements
- Provide technical support to SMEs
- Facilitate verification and certification
- Engage with EU authorities on SME concerns
The Compliance Cost Subsidy
The government is also exploring options to support SMEs with compliance costs, recognising that the ₹15–20 lakh per unit burden could push many smaller exporters out of EU supply chains.
The FTA’s SME Provisions
Jain rejected concerns that the agreement would adversely affect Indian SMEs, saying India and the EU have complementary trade structures. “Our SMEs can manufacture for some big European manufacturers. They have opportunities of direct exports also. I think there is a lot of opportunity rather than any fear of competition.”
Compliance Costs: ₹15–20 Lakhs Per Unit
The Cost Breakdown
Meeting the requirement under the carbon tax alone could cost an MSME unit between ₹15 lakh and ₹20 lakh. This includes:
| Cost Category | Description |
|---|---|
| Carbon accounting | Measuring and calculating embedded emissions |
| Third-party verification | Hiring accredited verifiers |
| Digital reporting systems | Setting up data collection and reporting infrastructure |
| Capacity building | Training staff on CBAM requirements |
| Audit costs | External audits and certifications |
Why These Costs Are Crippling
These are largely fixed compliance costs, which means they do not reduce in proportion to the size of the business or export volumes. As a result, MSMEs bear a disproportionately higher compliance burden than larger exporters, potentially eroding their price competitiveness in the EU market.
The Export Viability Question
If these costs are not addressed through targeted policy support, smaller exporters may find continued access to the EU market commercially unviable despite having competitive products.
The 24.4% Decline Context
India’s steel and aluminium exports to the EU have already fallen from $7 billion to $5 billion and are expected to fall further. This trend will only accelerate as CBAM costs are fully applied.
Strategic Recommendations for SME Exporters
Recommendation 1: Participate in the CCTS
| Action | Why It Matters |
|---|---|
| Register your entity | Start the CCTS compliance process |
| Understand your target | Know your emission intensity target |
| Develop a compliance strategy | Meet your target or procure CCCs |
| Document compliance | Maintain records for verification |
Recommendation 2: Address the Data Gap
| Action | Why It Matters |
|---|---|
| Request verified emissions data | From large domestic producers |
| Conduct independent verification | Using accredited agencies |
| Maintain documentation | For CBAM declarations |
| Engage with FTA provisions | Use the CBAM annexure support |
Recommendation 3: Leverage Government Support
| Action | Why It Matters |
|---|---|
| Apply for compliance support | Access government programmes |
| Engage with industry associations | Build capacity and share costs |
| Access training programmes | Build internal carbon data capacity |
Recommendation 4: Prepare CBAM Data Packs
Exporters should develop internal CBAM pricing strategies and prepare standardised CBAM data packs for each manufacturing facility, detailing production routes, emissions intensity, verification status, and audit contacts.
Recommendation 5: Seek Professional Advice
| Action | Why It Matters |
|---|---|
| Engage a carbon advisory firm | Get expert guidance |
| Develop a comprehensive strategy | Address all aspects of compliance |
| Stay informed | Monitor regulatory developments |
Recommendation 6: Consider Alternative Markets
| Action | Why It Matters |
|---|---|
| Explore Africa | Growing markets with lower compliance barriers |
| Explore Middle East | Alternative export destinations |
| Diversify | Reduce dependence on EU markets |
The CBAM Expansion: 180 Additional Products by 2028
The Council’s Decision
In June 2026, the EU Council agreed to strengthen the CBAM, expanding its reach to more products and introducing strict anti-circumvention measures.
Key Changes
| Change | Impact |
|---|---|
| Expansion to 180 additional products | More Indian exports affected |
| Anti-circumvention framework | Prevents exporters from bypassing the tax |
| Tightened carbon accounting | Stricter rules for scrap-based production |
| Timeline | January 1, 2028 |
What This Means for SMEs
- CBAM coverage will expand significantly in 2028
- More Indian products will face carbon border taxes
- Preparation is essential
How Carboned.in Can Help
At Carboned.in, we help Indian SME exporters navigate CBAM with clarity and confidence.
Our CBAM Readiness Services for SMEs
| Service | What We Do |
|---|---|
| CBAM Exposure Assessment | Evaluate your exposure and risk |
| Data Gap Analysis | Identify missing emissions data |
| Carbon Data Systems | Help you build internal data collection systems |
| Verification Support | Connect you with accredited verifiers |
| CBAM Data Pack Preparation | Help you prepare standardised data packs |
| FTA Support | Help you leverage the India-EU FTA CBAM annexure |
| CCTS Compliance | Help you meet domestic compliance obligations |
| Credit Procurement | Buy CCCs to demonstrate carbon compliance |
Why Choose Carboned.in?
| Reason | Why It Matters |
|---|---|
| Legal Expertise | Led by Siddharth Gupta, Advocate, Calcutta High Court |
| Regulatory Knowledge | Deep understanding of CBAM, CCTS, and trade policy |
| MSME Focus | Tailored solutions for small and medium enterprises |
| End-to-End Support | From assessment to compliance |
Your first consultation is completely free. No obligation. Just honest advice.
Conclusion
CBAM is not a distant threat. It is already affecting Indian exports. For MSMEs, the compliance burden is disproportionately high, with costs of ₹15–20 lakhs per unit and default values that inflate carbon costs.
Key Takeaways
| Aspect | What You Need to Know |
|---|---|
| Combined Export Decline | 24.4% in FY 2025 |
| Steel Decline | 35.1% |
| CBAM Certificate Price | EUR 75.36 per tonne |
| CBAM Cost (BF-BOF Steel) | ~$192 per tonne |
| Price Reduction Required | 16-22% |
| CBAM Tax Burden | 20-35% on steel exports |
| MSME Compliance Cost | ₹15–20 lakhs per unit |
| FTA Implementation | Likely 2027 |
| CBAM Expansion | 180 additional products from 2028 |
The Choice Is Yours
| Option | Outcome |
|---|---|
| Act now | Build carbon data capacity, access government support, protect export business |
| Wait and see | Face default values, higher costs, loss of EU market access |
How Carboned.in Can Help
At Carboned.in, we help Indian SME exporters navigate CBAM with clarity and confidence.
- CBAM Exposure Assessment: Understand your risk
- Data Gap Analysis: Identify missing data
- Carbon Data Systems: Build internal capacity
- Verification Support: Connect with accredited verifiers
- CBAM Data Packs: Prepare for EU requirements
- FTA Support: Leverage the India-EU FTA annexure
Your first consultation is completely free. No obligation. Just honest advice.
How Carboned.in can help
Our team covers every dimension of India's carbon market — pick the service that matches where you are.
Frequently Asked Questions
What is CBAM?+
The EU's Carbon Border Adjustment Mechanism — a carbon tariff on imports effective from January 1, 2026.
How has CBAM affected Indian exports?+
Steel and aluminium exports to the EU fell 24.4% in FY 2025, with steel down 35.1%, before any CBAM financial obligation had taken effect.
What is the CBAM certificate price?+
EUR 75.36 per tonne of CO₂ equivalent for Q1 2026.
What is the MSME data gap?+
Smaller exporters often lack verified emissions data from large producers, exposing them to high default emission values.
What is the India-EU FTA CBAM annexure?+
A dedicated annexure in the FTA with provisions to ease compliance for exporters, especially SMEs.
What are the four pillars of the CBAM annexure?+
Flexibility, SME compliance, verification, and carbon price offset.
What is the CBAM compliance cost for MSMEs?+
₹15 lakh to ₹20 lakh per unit annually.
How does the FTA help SMEs?+
The FTA includes provisions to ease compliance for SMEs and may provide support for verification and carbon price offset.
When will the India-EU FTA take effect?+
Expected to be signed in 2026, with implementation likely in 2027.
When will CBAM expand?+
CBAM will expand to 180 additional products from January 1, 2028.
What should SME exporters do now?+
Participate in CCTS, address the data gap, leverage government support, prepare CBAM data packs, and seek professional advice.
How can Carboned.in help?+
We provide CBAM exposure assessment, data gap analysis, verification support, CBAM data pack preparation, and FTA support.
Siddharth Gupta is the founder of Carboned.in and specialist counsel for India's carbon compliance framework — advising obligated entities, project developers, and buyers on CCTS, CR-I registration, and credit transactions.
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