EU's CBAM Poses Major Compliance Challenge for Indian MSMEs

New Delhi, India Jul 3, 2026 ALN: New Delhi: Indian Micro, Small, and Medium Enterprises (MSMEs) face severe compliance challenges under the European Union's Carbon Border Adjustment Mechanism (CBAM), prompting industry experts to call for immediate state intervention, technology transfer, and alternate export supply chains.

The CBAM is a significant regulatory measure introduced by the European Union to address climate change by imposing a tax on the carbon content of goods imported into the EU. This mechanism aims to protect European industries from carbon leakage, which occurs when businesses transfer production to countries with less stringent climate policies. As the EU seeks to achieve its ambitious climate goals, the CBAM represents a critical step towards ensuring that imported goods meet the same environmental standards as those produced within the EU.

For Indian MSMEs, which constitute a vital segment of the , the implications of the CBAM are profound. R. R. Rashmi, Distinguished Fellow at The Energy and Resources Institute (TERI), speaking to the media on the sidelines of PHDCCI's Carbon Shift India 2026 conference, stated that while large-scale industries possess some technical resilience, smaller units lack both the financial capacity and the reporting framework required by European regulations. This disparity raises concerns about the future competitiveness of Indian MSMEs in the international market.

"The large industries, like iron and steel or aluminum, do have some financial and technical capacity," Rashmi said. "It's not that they are completely ready—it is an additional cost for them too—but they do have the capacity. The biggest concern is for our small units, the MSMEs. They have neither the capacity nor the resources." This highlights a critical gap in the ability of smaller enterprises to adapt to stringent regulatory frameworks that are becoming increasingly common in international trade.

The EU's tax on the carbon content of carbon-intensive goods imported into their region threatens the export competitiveness of domestic steel and aluminum sectors, demanding urgent structural adjustments within India's manufacturing ecosystem. The imposition of such a tax raises the stakes for Indian manufacturers, who are now faced with the dual challenge of meeting domestic production costs while also adhering to international compliance standards.

To protect domestic interests, Rashmi suggested implementing an internal data collection system to monitor and measure carbon intensity, alongside converting existing indirect domestic levies into an explicit carbon tax to keep funds within the country. This approach could not only enhance transparency but also create a more robust framework for managing carbon emissions at the national level. By establishing a comprehensive data monitoring system, India could ensure that its industries are better prepared to meet international standards, thereby maintaining their competitive edge.

"Apart from the suggestions I just gave for resources, there is a critical need for capacity building, and for that, we should make a fund at the national level so that we can support these small units," Rashmi added. The establishment of a dedicated fund could provide the necessary financial backing for MSMEs to invest in cleaner technologies and compliance measures, ultimately facilitating their integration into the global market.

Additionally, Rashmi advocated for a mutual recognition regime between European verification agencies and the Export Inspection Council of India to prevent expensive foreign auditing costs. This would significantly alleviate the financial burden on smaller enterprises, allowing them to allocate resources more effectively towards compliance and operational improvements.

The lack of equity in the global carbon accounting framework emerged as a primary grievance for the manufacturing sector. The current rules create an uneven landscape for developing economies that operate under different baseline targets. This disparity raises questions about the fairness of imposing stringent regulations on countries that are still in the process of industrial development. The challenge for Indian MSMEs is not only to comply with these regulations but also to navigate the complexities of a global trade environment that may not always take their circumstances into account.

Ravinder Bhan, Senior Director at the Indian Steel Association, stated that CBAM functions as a tax set up by the European Union Commission to upgrade their own industries and technology. He noted that if Indian exports of steel or aluminum do not meet European emission targets, the tax applies disproportionately. This creates a scenario where smaller Indian manufacturers, who may already be operating on thin margins, face further financial strain due to compliance costs.

"What about small and medium-sized companies? They will be in trouble because they have to hire an auditor who will accredit the European Union. Till now, they have not allowed accreditation. So, they have to take the certificate. It is a costly thing. They have to audit and upgrade the system but it is a costly affair. They will not be able to afford it," Bhan explained. The financial implications of these requirements could lead to a significant reduction in the competitiveness of Indian MSMEs, potentially resulting in job losses and a decline in local activity.

Jatinder Singh, Deputy Secretary General, PHDCCI, focused on how MSMEs can overcome these challenges through government-backed monitoring technologies to track carbon footprints directly at the manufacturing source. The integration of advanced monitoring technologies could facilitate real-time tracking of emissions, enabling companies to make necessary adjustments to their production processes in order to comply with international standards.

He observed that while heavy industries have set Net Zero targets, these do not match EU benchmarks, leading to lower steel and aluminum exports over the last few months. This misalignment underscores the need for Indian industries to not only adopt ambitious environmental targets but also to ensure that these targets are in line with international expectations.

"Therefore, we should reorient toward other sectors, such as Africa and similar regions. For this reorientation, our industry, with the support of the Government of India, is highly capable," Singh stated. This strategic pivot could provide Indian MSMEs with new opportunities for growth and expansion, allowing them to mitigate the risks associated with over-reliance on traditional markets.

He added that companies are actively seeking alternative supply chains and new destination countries, which will soon mitigate the initial export shocks felt by the sector. This adaptability is crucial for the long-term sustainability of Indian MSMEs, as they navigate a rapidly changing global trade landscape characterized by increasing environmental regulations and shifting market dynamics.

In conclusion, the challenges posed by the EU's CBAM present both significant risks and opportunities for Indian MSMEs. While the compliance burden may be daunting, proactive measures such as government support, technology transfer, and strategic market diversification could empower smaller enterprises to thrive in an increasingly competitive global environment. The future of Indian MSMEs will depend on their ability to innovate and adapt to these new realities, ensuring that they not only survive but also contribute meaningfully to the global effort to combat climate change.