Centre to Cover 90% of EU Carbon Tax Compliance Costs for MSMEs

The Indian government is developing a scheme to absorb 90% of the compliance costs incurred by micro, small, and medium enterprises (MSMEs) under the European Union's Carbon Border Adjustment Mechanism (CBAM). This initiative aims to mitigate the disproportionate financial burden imposed by the EU's carbon tax, which came into effect on January 1, 2026.

India's efforts to negotiate concessions for its small industries with developed nations have not succeeded, prompting the industry to seek domestic assistance. The UK is also planning to introduce a similar carbon border adjustment mechanism from 2027.

CBAM is an EU policy that prices the carbon emissions embedded in carbon-intensive goods imported into the bloc. Compliance requires declarants to track both direct and indirect emissions—for sectors like cement and fertilisers—posing a significant challenge for MSMEs. Industry sources estimate that compliance costs per MSME unit range from Rs 15 lakh to Rs 20 lakh annually, and many lack the resources to report the required data.

India is the world's second-largest producer of crude steel and primary aluminium, making it particularly vulnerable to CBAM's impact. Under the regulation, Indian exporters must submit CBAM certificates corresponding to total embedded emissions. If exporters cannot provide actual data, importers must use default values set by the European Commission, which include escalating mark-ups: 10% in 2026, 20% in 2027, and 30% from 2028 onwards.

Ayush A Mehrotra, Partner at Khaitan & Co, explained that the principal challenge for MSMEs is not the carbon levy itself but the cost of compliance. Unlike large corporations, MSMEs lack technical expertise, systems, and financial resources to measure, verify, and report emissions. They face significant upfront costs for carbon accounting, third-party verification, digital reporting, and capacity building. These fixed costs do not scale with business size, leading to a disproportionate burden on smaller exporters and potentially eroding their competitiveness in the EU market.

A working paper by the Indian Council for Research on International Economic Relations (ICRIER) released this month indicates that India's exports to the EU for all CBAM commodities will decline. The iron and steel sector is expected to be the hardest hit, with imports by the EU dropping by about 24%. Fertiliser and aluminium products follow. India's global export of iron and steel could decline by 5.7%, compared to 1.2% for China. The report notes that CBAM will adversely affect India's trade with the EU but will have negligible impact on global carbon emissions.

The government's proposed scheme, which covers 90% of compliance costs, aims to help MSMEs navigate these challenges and maintain access to the EU market. Details of the scheme are still being finalised.