The European Union's Carbon Border Adjustment Mechanism (CBAM), initially impacting sectors like steel and aluminum, is set to expand significantly, potentially affecting thousands of Indian micro, small, and medium enterprises (MSMEs) by 2028. This move, which will introduce carbon taxes on 180 new steel and aluminum-based products, creates a complex challenge for Indian exporters.
Expanding Scope of EU Carbon Tax
According to the Global Trade Research Initiative (GTRI), a prominent trade think tank, the CBAM should no longer be viewed as a regulation solely for steel and aluminum. GTRI estimates that by 2030, a majority of industrial products entering the EU could face some form of carbon tax exposure. The definitive regime for CBAM compliance begins with the first annual declaration for 2026 imports, due on September 30, 2027.
This means Indian firms exporting to the EU will need to either physically reduce emissions at their source or operate under a domestic carbon pricing system that is recognized by the EU. The European Parliament has also opposed allowing international carbon credits for CBAM compliance, emphasizing direct emissions reduction.
Challenges for Indian MSMEs
Anil Bhardwaj, Secretary General of the Federation of Indian Micro Small & Medium Enterprises (FISME), describes the situation as "very challenging," noting that emissions calculations will be required on a product-by-product basis. A major hurdle for MSMEs is their heavy dependence on grid power, which in India, is approximately 80-85% coal-based thermal power. This contrasts with larger industries that often have the capacity to establish their own captive green energy plants.
Bhardwaj stated that FISME is actively engaging with the Indian government to explore how green power can be made available to industrial clusters that export to the EU. Another significant issue for the sector is the general lack of comprehensive data on emissions, complicating compliance efforts.
India's Response and Broader Context
The EU accounted for 17% of India’s exports in 2025, making it India’s third-largest trading partner. The impact of CBAM will be most acutely felt in carbon-intensive, trade-exposed sectors such as steel, aluminum, cement, and fertilizers. Exporters will need to comply with mandatory emissions disclosures, purchase certificates aligned with EU Emission Trading System prices, and undergo stringent verification processes.
India has introduced the Carbon Credit Trading Scheme (CCTS) with the goal of reducing greenhouse gas emissions through the trading of Carbon Credit Certificates. However, the market for issuing credits under this compliance mechanism has not yet become operational. As global trading partners increasingly mandate lower emissions, India faces the external challenge of adapting its export-oriented industries to a low-carbon roadmap, with the EU's CBAM being a primary driver.