The MSME CBAM Outreach – How India Is Preparing Small Exporters for the Carbon Border Tax

Introduction: The CBAM Challenge for Indian MSMEs

The European Union's Carbon Border Adjustment Mechanism (CBAM) is now a reality. From January 1, 2026, CBAM moved from a reporting-only framework to a payment-linked regime, imposing binding financial obligations on EU importers of carbon-intensive goods.

For India's micro, small, and medium enterprises (MSMEs), this transition represents an existential threat. 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.

The numbers are sobering. India's steel and aluminium exports to the EU fell 24.4% in FY 2025, with steel alone down 35.1% , before any CBAM financial obligation had taken effect. The decline suggests European buyers are already reorienting toward lower-emission producers.

In July 2026, the Commerce Ministry announced a nationwide district-level outreach initiative to help MSMEs adapt to the EU CBAM. The campaign targets MSME exporters to ensure smooth compliance with the framework following the conclusion of the India-EU Free Trade Agreement (FTA).

This guide provides a comprehensive analysis of the MSME CBAM challenge, the government's response, and what small exporters must do to survive and thrive in the new carbon-constrained trade environment.

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What Is CBAM and Why Does It Matter for MSMEs?

What Is CBAM?

The Carbon Border Adjustment Mechanism is the EU'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.

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 CBAM Transition

Phase	Period	Requirement
Transitional	October 2023 – December 2025	Reporting only, no payment
Definitive	January 1, 2026	Payment phase begins

Why MSMEs Are Disproportionately Affected

Factor	Impact on MSMEs
Limited technical expertise	Cannot measure and verify embedded emissions
Inadequate data systems	Cannot track emissions across supply chains
Financial constraints	Cannot afford third-party verification
Fixed compliance costs	Costs do not scale with business size
Default values penalty	Punished for lack of actual data

As Darpan Jain, Additional Secretary in the Department of Commerce, noted: "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."

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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
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 Trap

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.

The Impact on MSMEs

The CBAM poses significant financial risks, compliance friction, and verification hurdles for Indian MSMEs. To protect small exporters, negotiators secured a dedicated annexure in the FTA.

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The Commerce Ministry's District-Level Outreach Initiative

The Announcement

In August 2026, the Commerce Ministry announced a nationwide district-level outreach initiative to help MSMEs adapt to the EU CBAM. The campaign targets MSME exporters to ensure smooth compliance with the framework following the conclusion of the India-EU FTA.

The Plans

Initiative	Description
District-Level Workshops	Organise workshops across districts
Digital Engagement Tools	Introduce digital tools for MSMEs
FTA Leveraging	Focus on leveraging the FTA
Carbon Mapping	Map embedded carbon
Verification Preparation	Prepare exporters for third-party emissions verification

The Focus Areas

Focus Area	Description
FTA Leverage	Help MSMEs understand and use FTA provisions
Carbon Mapping	Help MSMEs measure embedded carbon
Verification	Prepare MSMEs for third-party verification

The Commerce Ministry's Commitment

Darpan Jain, Additional Secretary, Department of Commerce, stated: "There is a comprehensive work plan under an annexure on CBAM, and we are working on it. I am very hopeful that SMEs will not face any problem."

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The India-EU FTA CBAM Annexure: A Protective Framework

What Is the CBAM Annexure?

The CBAM annexure is a dedicated section of the India-EU FTA that addresses CBAM-related concerns. It provides a comprehensive work plan to help India navigate the EU's carbon tax regime.

The Key Provisions

Provision	Description
Flexibility	In case of flexibility in future, that will be available to India
SME Support	Help Indian SMEs meet compliance requirements
Verification	Provisions for verification and recognition of verifiers
Carbon Price Offset	Engage with EU authorities on taking into account the carbon price paid in India

The Bilateral Work Plan

The bilateral work plan guarantees parity with future flexibilities granted by the EU and creates channels to credit domestic carbon taxes paid in India against European levies.

The SME Protection

To protect small exporters, negotiators secured a dedicated annexure in the FTA.

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The Four Pillars of MSME Support

Pillar 1: Flexibility

Aspect	Description
What It Means	In case of flexibility in future, that will be available to India
Why It Matters	Ensures MSMEs are not locked into rigid compliance requirements

Pillar 2: SME Compliance Support

Aspect	Description
What It Means	Help Indian SMEs meet compliance requirements
Why It Matters	SMEs face disproportionate compliance burdens

Pillar 3: Verification Recognition

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

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The Compliance Cost Burden: ₹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.

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.

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.

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The Government's Strategy: Digital Tools and Carbon Mapping

Digital Engagement Tools

The Commerce Ministry plans to introduce digital engagement tools for MSMEs. These tools will help MSMEs:

Tool	Purpose
Carbon Accounting Software	Measure embedded carbon
Verification Platforms	Connect with accredited verifiers
Reporting Templates	Prepare standardised CBAM data packs
Training Modules	Build capacity on CBAM requirements

Carbon Mapping

The outreach initiative will focus on mapping embedded carbon. This involves:

Step	Description
1. Data Collection	Collect emissions data from suppliers
2. Calculation	Calculate embedded carbon
3. Verification	Verify data with third-party agencies
4. Reporting	Prepare CBAM data packs

Verification Preparation

Exporters must prepare for third-party emissions verification. This includes:

Action	Description
Engage Verifiers	Connect with accredited verification agencies
Prepare Documentation	Maintain comprehensive records
Ensure Traceability	Ensure data can be traced back to source records
Conduct Pre-Audits	Prepare for verification audits

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The CBAM Certificate Price: EUR 75.36 per Tonne

The First 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.

What This Means

This is no longer a compliance exercise on paper. For any exporter of iron, steel, aluminium, cement, fertilisers, hydrogen, or electricity into the EU, carbon cost is now a line item in the cost of goods sold, not a future risk.

The Connection to CCTS

A functioning national carbon market gives Indian producers a documented basis for demonstrating carbon costs already paid, which is directly relevant to CBAM exposure.

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The CBAM Tax Burden: 20-35% on Imports

The Tax Burden

The CBAM could impose a 20-35% tax on specific imports into the EU beginning 1 January 2026.

The Sectoral Impact

Sector	Tax Burden
Steel	20-35%
Aluminium	20-35%
Cement	20-35%

The Production Route Factor

The production method matters significantly:

Production Route	CBAM Exposure	Explanation
Blast Furnace-Basic Oxygen Furnace (BF-BOF)	Highest	Relies on coal; highest emissions
Gas-based Direct Reduced Iron (DRI)	Lower	Uses natural gas; lower emissions
Scrap-based Electric Arc Furnace (EAF)	Lowest	Uses recycled scrap; lowest emissions

The India-Specific Challenge

India's steel emission intensity is significantly higher than the global average. This gap means Indian MSME steel producers face a significant disadvantage in carbon-constrained export markets.

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The Default Values Trap: Why MSMEs Are Most Vulnerable

What Are Default Values?

Default values are emission factors provided by the European Commission for use when actual emissions data is not available. They are set at conservative, high benchmarks.

The Mark-Up Schedule

Year	Mark-Up Percentage
2026	10%
2027	20%
2028 onwards	30%

The MSME Trap

The default values create a vicious cycle for MSMEs:

Step	Description
1. No Data	MSME cannot provide actual emissions data
2. Default Values	EU authorities apply default values (set at highest benchmarks)
3. Inflated Costs	Default values inflate carbon costs
4. Price Disadvantage	MSME loses price competitiveness
5. Lost Business	MSME loses export business

The Export Decline

India's steel and aluminium exports to the EU have already fallen significantly. The default values trap could accelerate this decline for MSMEs.

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The SME Perspective: Concerns and Hopes

Concerns

Concern	Description
Compliance Costs	₹15-20 lakhs per unit
Verification Hurdles	Difficulty finding accredited verifiers
Data Gap	Lack of access to supplier emissions data
Competitiveness	Risk of losing export business

Hopes

Hope	Description
FTA Annexure	Dedicated CBAM framework for SMEs
Government Support	District-level outreach and digital tools
Carbon Price Offset	Domestic carbon costs offset against CBAM liabilities
Capacity Building	Training and capacity building programmes

The Official's Assurance

Darpan Jain, Additional Secretary, Department of Commerce, stated: "I am very hopeful that SMEs will not face any problem."

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What MSMEs Must Do Now

Recommendation 1: 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 2: Leverage Government Support

Action	Why It Matters
Participate in outreach	Attend district-level workshops
Use digital tools	Access carbon accounting and reporting tools
Engage with industry associations	Build capacity and share costs
Access training programmes	Build internal carbon data capacity

Recommendation 3: Prepare CBAM Data Packs

Action	Why It Matters
Standardise data packs	For each manufacturing facility
Detail production routes	Show emissions intensity
Document verification status	Provide audit contacts
Maintain documentation	For CBAM declarations

Recommendation 4: 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

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

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Our CBAM Readiness Services for MSMEs

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.

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Conclusion: Protecting India's Small Exporters

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 Tax Burden	20-35%
MSME Compliance Cost	₹15–20 lakhs per unit
Government Support	District-level outreach, digital tools, FTA annexure
SME Protection	Four pillars: flexibility, compliance support, verification recognition, carbon price offset

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

📞 Ready to Protect Your MSME Export Business?

Book a free consultation with Siddharth Gupta, Advocate, Calcutta High Court.

• Assess your CBAM exposure
• Build carbon data capacity
• Access government support
• Ensure legal and regulatory compliance

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