CBAM and Indian MSMEs – The Compliance Challenge and Survival Guide

Introduction: The CBAM Earthquake

The Carbon Border Adjustment Mechanism (CBAM) came into effect on January 1, 2026. For India's micro, small, and medium enterprises (MSMEs) that export to the European Union, this is not just a regulatory change — it is an earthquake.

The numbers are stark. India's steel and aluminium exports to the European Union fell 24.4% in FY2025, dropping from $7.71 billion in FY2024 to $5.82 billion. This decline occurred before any CBAM financial obligation had taken effect. European buyers are already reorienting toward lower-emission producers, and MSMEs are the most vulnerable.

"CBAM could become a serious barrier for MSME exporters, not because of product quality or pricing, but due to the lack of access to verified emissions data," said Vinod Kumar, president of the SME Forum.

This guide provides a comprehensive survival guide for Indian MSMEs facing CBAM compliance — the challenges, the costs, the lifelines, and a practical checklist for survival.

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What Is CBAM and Why Does It Matter to MSMEs?

What Is CBAM?

The Carbon Border Adjustment Mechanism is the EU's carbon border tax mechanism aimed at levelling the playing field between European manufacturers and overseas exporters. It imposes a carbon price on imports of carbon-intensive goods such as steel, aluminium, cement, fertilisers, hydrogen, and electricity.

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 Certificate Price

The first quarterly price for CBAM certificates was set at EUR 75.36 per tonne of CO₂ equivalent for Q1 2026.

Why MSMEs Are Most Vulnerable

Factor	Why It Matters
Limited resources	MSMEs lack the financial and technical resources for compliance
Data gap	MSMEs often lack access to verified emissions data from large producers
No dedicated teams	Unlike large companies, MSMEs don't have sustainability teams
Export dependency	Many MSMEs depend on EU exports for their survival
Low margins	MSMEs operate on thin margins and cannot absorb additional costs

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The MSME Data Gap: A Critical Vulnerability

The Problem

A key problem is that large producers often do not share plant-level emissions data with MSMEs that source steel or aluminium from them, leaving smaller firms without the verified carbon information required under CBAM.

The Default Values Risk

In the absence of such data, EU authorities may apply default emission values, usually set at the highest benchmarks, which can sharply inflate carbon costs even when actual emissions are lower.

The Impact on MSMEs

"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," said Ajay Srivastava, GTRI Founder.

The CBAM Compliance Concern

"CBAM compliances are a concern among SMEs in terms of verification, in terms of finding out what is the value of embedded carbon, in terms of ensuring that the verifiers are recognised by the EU authorities."

The Data Gap in Numbers

Aspect	Large Producers	MSMEs
Emissions data access	Yes (internal systems)	Often no
Verification capacity	Yes (dedicated teams)	Often no
CBAM data packs	Yes (prepared)	Often no
Risk of default values	Low	High

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How CBAM Works: A Primer for Exporters

The CBAM Process for Exporters

Step	What the Exporter Must Do	Timeline
1. Measure emissions	Calculate embedded emissions for each product	Ongoing
2. Verify emissions	Get emissions data verified by an accredited verifier	Before export
3. Prepare CBAM data pack	Compile verified emissions data for EU importer	Before export
4. Share with EU importer	Provide data pack to EU importer	Before export
5. Importer declares	EU importer declares emissions and purchases certificates	On import
6. Annual reporting	Maintain records for annual compliance	Annually

What "Embedded Emissions" Means

Embedded emissions are the total greenhouse gas emissions emitted during the production of a product, including:

• Direct emissions (Scope 1)
• Indirect emissions from electricity (Scope 2)
• Some upstream emissions (Scope 3)

The Default Value Trap

If an exporter cannot provide verified emissions data, the EU importer must use default values — which are set at the highest benchmarks. This can increase the CBAM cost by 50-100% or more.

The Cost Impact

Scenario	CBAM Cost per Tonne
With verified data (low emissions)	€40-60
With verified data (medium emissions)	€60-80
With default values (high emissions)	€80-120+

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The Indian MSME Sector: Scale and Exposure

The Scale of Indian MSMEs

Metric	Value
Number of MSMEs	~63 million
Employment	~110 million
Share of GDP	~30%
Share of exports	~45%

CBAM-Exposed MSMEs

MSMEs in the following sectors are most exposed to CBAM:

Sector	Exposure Level	Reason
Steel products	Very High	Steel is a CBAM-covered product
Aluminium products	Very High	Aluminium is a CBAM-covered product
Cement products	High	Cement is a CBAM-covered product
Fertiliser products	High	Fertilisers are CBAM-covered products
Metal products	Moderate	Downstream products increasingly covered
Engineering goods	Moderate	Embedded steel/aluminium content

The EU Market Dependency

Sector	EU Share of Exports
Steel	~40%
Aluminium	~26%
Engineering goods	~20%

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The CBAM Compliance Burden: What MSMEs Must Do

The Compliance Requirements

Requirement	What MSMEs Must Do	Complexity
Measure embedded emissions	Calculate emissions for each product	High
Verify emissions data	Get data verified by accredited verifier	High
Prepare CBAM data packs	Compile standardised data packs for EU importers	Medium
Maintain records	Keep records for 4+ years	Medium
Respond to EU queries	Answer queries from EU importers	Low

The Technical Expertise Gap

Unlike large corporations with dedicated sustainability teams and robust data systems, MSMEs often lack:

• Technical expertise in emissions measurement
• Systems for data collection and management
• Access to accredited verifiers
• Understanding of CBAM requirements

The Compliance Cost

Meeting the requirement under the carbon tax alone could cost an MSME unit between ₹15 lakh and ₹20 lakh. These are largely fixed compliance costs, which do not reduce in proportion to the size of the business.

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The Cost of Compliance: What the Numbers Really Mean

Direct Compliance Costs

Cost Item	Estimated Cost (₹)
Emissions measurement	2-5 lakhs
Verification by accredited verifier	3-7 lakhs
CBAM data pack preparation	2-4 lakhs
Legal and advisory fees	3-5 lakhs
Training and capacity building	1-3 lakhs
Total	11-24 lakhs

The Fixed Cost Problem

These costs are largely fixed — they do not reduce in proportion to the size of the business. A small exporter with ₹2 crore in exports faces the same compliance costs as a large exporter with ₹200 crore in exports.

The Impact on Profit Margins

Export Value	Compliance Cost	Impact on Margin
₹2 crore	₹15 lakhs	7.5%
₹5 crore	₹18 lakhs	3.6%
₹10 crore	₹20 lakhs	2.0%
₹50 crore	₹24 lakhs	0.5%

The CBAM Tax Impact

In addition to compliance costs, MSMEs face the CBAM tax itself:

Product	CBAM Tax Impact
Steel products	20-35% tax burden
Aluminium products	Significant (coal-based power increases burden)
Cement products	Growing impact

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The India-EU FTA CBAM Annexure: A Lifeline for MSMEs

What Is the CBAM Annexure?

The India-European Union Free Trade Agreement (FTA) includes a dedicated annexure on the EU's Carbon Border Adjustment Mechanism (CBAM), with provisions to ease compliance for exporters, recognise India's future carbon pricing framework and address concerns of small and medium enterprises (SMEs).

The CBAM Annexure: A Dedicated Framework

"CBAM was one of the topics which took up a lot of our negotiating capital. If you see the text of the agreement, there is a separate annexure on dealing with Carbon Border Adjustment Mechanism."

The Four Pillars

The annexure is built around multiple pillars aimed at reducing compliance burdens for Indian exporters:

Pillar	Description
1. Flexibility	If the EU grants any future flexibility under CBAM, the same will be extended to India
2. SME Compliance	Help Indian SMEs meet compliance requirements
3. Verification	Provisions for verification and recognition of verifiers
4. Carbon Price Offset	Engage with EU authorities on taking into account the carbon price paid in India

Why This Matters for MSMEs

"I am very hopeful that SMEs will not face any problems," said Darpan Jain, Additional Secretary in the Department of Commerce.

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The Four Pillars of MSME Protection

Pillar 1: Flexibility

Provision	What It Means for MSMEs
Future flexibility	If the EU grants any flexibility in CBAM in future, that will be available to India
Obligation	There is an obligation in the agreement that India will receive the same flexibility
Protection	MSMEs benefit from any future easing of CBAM requirements

Pillar 2: SME Compliance Support

Provision	What It Means for MSMEs
Separate provisions	There are separate provisions to help Indian SMEs meet CBAM compliance requirements
Technical assistance	Support for SMEs lacking technical expertise
Capacity building	Building capacity for compliance

Pillar 3: Verification and Recognition

Provision	What It Means for MSMEs
Verification support	Provisions for verification of embedded carbon emissions
Recognition of verifiers	Ensuring verifiers are recognised by EU authorities
Reduced costs	Indian verifiers can reduce compliance costs

Pillar 4: Carbon Price Offset

Provision	What It Means for MSMEs
Carbon price recognition	Engagement with EU authorities on taking into account the carbon price paid in India
CCTS connection	India's carbon pricing mechanism can offset CBAM liabilities
Cost reduction	Carbon costs paid in India can be offset against CBAM

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Verification and Recognition of Verifiers

The Verification Challenge

Currently, EU authorities may not recognise Indian verifiers for CBAM purposes. This forces Indian exporters to hire expensive EU auditors, adding to compliance costs.

The FTA Solution

The CBAM annexure includes provisions for verification and recognition of verifiers, aimed at:

• Recognising Indian verification agencies
• Reducing compliance costs for Indian exporters
• Building Indian capacity for carbon verification

What This Means for MSMEs

Aspect	Current Situation	With FTA
Verifiers	Must hire EU-recognised auditors	Indian verifiers may be recognised
Cost	High (€70-80 per tonne)	Lower
Capacity	Limited Indian capacity	Indian capacity built over time

The Mutual Recognition Goal

The goal is a mutual recognition regime between European verification agencies and Indian verification bodies to prevent expensive foreign auditing costs.

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Carbon Price Offset: The CCTS Connection

The Mechanism

CBAM allows for the deduction of a carbon price already paid in the country of origin.

India's Carbon Pricing 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."

The CCTS Connection

Aspect	Connection
Carbon price	CCTS creates a domestic carbon price
CBAM deduction	Carbon prices paid through CCTS could be deducted from CBAM liabilities
MSME benefit	MSMEs that participate in CCTS could reduce CBAM costs

What MSMEs Must Do

Action	Why It Matters
Understand CCTS	Learn how India's carbon market works
Participate if applicable	If covered, participate in CCTS compliance
Document carbon costs	Maintain records for CBAM declarations
Engage with FTA provisions	Leverage the CBAM annexure

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The Commerce Ministry's Outreach Programme

The Programme

The Commerce Ministry has planned an extensive outreach programme covering more than 700 districts, working with State governments to educate businesses on the FTA.

Key Features

Feature	Description
District-level outreach	"We want to go to all the districts and conduct outreach programmes there"
Industry education	Tell industry about what is in the FTA
Opportunity exploration	How they can use it, explore opportunities
Capacity building	Build understanding of CBAM requirements

Why It Matters for MSMEs

The outreach programme will help MSMEs:

• Understand FTA provisions
• Leverage CBAM annexure benefits
• Access compliance support
• Prepare for CBAM implementation

What MSMEs Should Do

Action	Timeline
Stay informed	Monitor outreach programmes in your district
Engage with programmes	Attend workshops and training sessions
Ask questions	Seek clarification on CBAM requirements
Prepare	Use the information to prepare for compliance

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What MSMEs Must Do Now: A Survival Checklist

Immediate Actions (Next 30 Days)

Action	Why It Matters	Priority
Assess CBAM exposure	Determine if your products are covered	High
Identify data sources	Find emissions data for your products	High
Understand EU customer requirements	Ask EU buyers what they need	High

Short-Term Actions (Next 3 Months)

Action	Why It Matters	Priority
Develop emissions measurement capability	Essential for CBAM compliance	High
Engage with verifiers	Find accredited verifiers	High
Prepare CBAM data packs	Standardise data for EU buyers	High
Apply for government support	Access compliance cost subsidy	High

Medium-Term Actions (Next 6-12 Months)

Action	Why It Matters	Priority
Reduce emissions	Lower CBAM liability	Medium
Participate in CCTS	Demonstrate carbon compliance	Medium
Build internal capacity	Develop in-house expertise	Medium
Engage with FTA provisions	Leverage CBAM annexure	Medium

The Survival Checklist

Check	Status
☐ I have assessed my CBAM exposure	☐ Yes / ☐ No
☐ I have identified emissions data sources	☐ Yes / ☐ No
☐ I have engaged with EU buyers on requirements	☐ Yes / ☐ No
☐ I have developed emissions measurement capability	☐ Yes / ☐ No
☐ I have engaged with an accredited verifier	☐ Yes / ☐ No
☐ I have prepared CBAM data packs	☐ Yes / ☐ No
☐ I have applied for government support	☐ Yes / ☐ No
☐ I have participated in outreach programmes	☐ Yes / ☐ No

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The Government's Compliance Cost Subsidy

The Proposed Scheme

The government is working on a scheme to cover 90% of compliance costs for MSMEs facing CBAM compliance.

How It Would Work

Aspect	Details
Coverage	90% of compliance costs
Eligibility	MSMEs exporting to the EU
Cost items	Emissions measurement, verification, data packs
Implementation	Through designated agencies

What This Means for MSMEs

Without Subsidy	With Subsidy
Compliance cost: ₹15-20 lakhs	Compliance cost: ₹1.5-2 lakhs
Significant burden on margins	Manageable cost
Risk of leaving EU market	Ability to stay in market

How to Apply

MSMEs should:

1. Stay informed about the scheme's launch
2. Prepare documentation of compliance costs
3. Apply through the designated portal
4. Engage with designated agencies

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CBAM Expansion: What's Coming in 2028

The EU 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 on MSMEs
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 MSMEs

• CBAM coverage will expand significantly in 2028
• More MSME products will face carbon border taxes
• Preparation is essential now

The EU Council Statement

"The EU remains committed to reducing climate emissions both within the Union and globally. Strengthening the CBAM and closing loopholes that can circumvent our rules is a key part in fulfilling that goal."

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How Carboned.in Can Help MSMEs

At Carboned.in, we help Indian MSMEs navigate CBAM with clarity and confidence.

Our Services for MSMEs

Service	What We Do
CBAM Exposure Assessment	Determine if your products are covered
Emissions Data Preparation	Help you calculate embedded emissions
Verifier Coordination	Connect you with accredited verifiers
CBAM Data Pack Preparation	Prepare standardised data packs for EU buyers
FTA-CBAM Advisory	Help you leverage the CBAM annexure
CCTS Advisory	Help you understand and participate in CCTS
Government Support Application	Help you apply for compliance cost subsidy
Legal Documentation	Draft contracts and compliance documents

Why Choose Carboned.in?

Reason	Why It Matters for MSMEs
Legal Expertise	Led by Siddharth Gupta, Advocate, Calcutta High Court
Regulatory Knowledge	Deep understanding of CBAM and trade policy
MSME Focus	We understand MSME constraints and needs
Cost-Effective	Affordable services for MSMEs
End-to-End Support	From assessment to compliance

Your first consultation is completely free. No obligation. Just honest advice.

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Conclusion

CBAM is not a distant threat. It is here. And for Indian MSMEs, the stakes could not be higher. The data gap, the compliance costs, the default value trap — these are real risks that could push many MSMEs out of EU supply chains.

Key Takeaways

Aspect	What MSMEs Need to Know
CBAM Effective Date	January 1, 2026
MSME Compliance Cost	₹15-20 lakhs
Government Subsidy	90% of compliance costs (proposed)
India-EU FTA	Dedicated CBAM annexure with four pillars
CBAM Expansion	180 additional products from 2028
Key Risks	Data gap, default values, compliance costs
Key Opportunities	FTA annexure, government subsidy, CCTS connection

The Choice Is Yours

Option	Outcome
Act now	Assess exposure, develop capability, access support, protect EU market access
Wait and see	Face higher costs, lose market share, suffer reputational damage

How Carboned.in Can Help

At Carboned.in, we help Indian MSMEs navigate CBAM with clarity and confidence.

• CBAM Exposure Assessment: Understand your risk
• Emissions Data Preparation: Calculate embedded emissions
• Verifier Coordination: Connect with accredited verifiers
• CBAM Data Packs: Prepare for EU requirements
• Government Support: Apply for compliance cost subsidy
• Legal Documentation: Ensure full compliance

Your first consultation is completely free. No obligation. Just honest advice.