The Indian government plans to cover 90% of the compliance costs for micro, small, and medium enterprises (MSMEs) facing the EU's Carbon Border Adjustment Mechanism (CBAM). This initiative aims to alleviate the significant financial and technical burden on these smaller businesses, which struggle with tracking embedded emissions required by the EU's carbon tax, effective January 1, 2026. The move comes after unsuccessful negotiations for concessions, highlighting the disproportionate impact on MSMEs.
The Indian government is developing a comprehensive scheme to absorb 90% of the compliance expenses faced by micro, small, and medium enterprises (MSMEs) due to the European Union's Carbon Border Adjustment Mechanism (CBAM). This intervention is designed to cushion the significant impact of the EU's carbon tax on these smaller businesses.
MSME Compliance Costs Soar
Industry sources indicate that each MSME unit could incur annual compliance costs ranging from Rs 15 lakh to Rs 20 lakh solely for the carbon tax. These enterprises often lack the necessary technical expertise and financial resources to meticulously track and report embedded emissions, including direct and indirect emissions for specific sectors like cement and fertilizers, as mandated by the EU regulation. The UK is also slated to implement its own CBAM version by 2027.
Navigating Default Values and Mark-ups
Under CBAM, exporters must submit certificates detailing the embedded emissions of their goods. Should actual data be unavailable, importers must utilize 'default values' provided by the European Commission. These default values are subject to mark-ups: 10% in 2026, 20% in 2027, and escalating to 30% from 2028 onwards, ensuring that underestimated emissions are accounted for. Partner Ayush A Mehrotra from Khaitan & Co noted that fixed compliance costs disproportionately affect MSMEs compared to larger corporations, potentially eroding their price competitiveness in the EU market.
Sectoral Impact on India
Analysis suggests that imports from India across CBAM-covered commodities could decline. The iron and steel sector is projected to experience the most significant impact, with an estimated 24% reduction in EU imports. Fertilizers, aluminum products, and metal products follow closely. India's global exports of iron and steel are expected to decrease by 5.7%, significantly higher than China's estimated 1.2% reduction. A report by the Indian Council for Research on International Economic Relations (ICRIER) indicated that while CBAM will adversely affect India's trade with the EU, its effect on actual carbon emissions remains negligible and difficult to quantify.