India To Subsidize EU Carbon Tax Compliance Costs For MSMEs

The Indian government is reportedly developing a strategy to absorb 90% of the compliance costs associated with the European Union’s Carbon Border Adjustment Mechanism (CBAM). This initiative aims to assist micro, small, and medium enterprises (MSMEs) that are struggling with the heavy financial burden of complying with EU emission reporting standards, which became mandatory on January 1, 2026. The cost per unit is estimated between Rs 15 lakh and 20 lakh, creating significant barriers for smaller exporters.

The CBAM policy mandates that exporters track and report embedded emissions for carbon-intensive goods, such as steel and fertilizers. MSMEs often lack the technical infrastructure and capital to conduct the rigorous carbon accounting required by the EU. If exporters fail to provide verified data, they are forced to use high default values, which include mark-ups of 10% in 2026, increasing to 30% by 2028. This disproportionately affects smaller players, potentially eroding their competitiveness in European markets.

With India being a leading global producer of steel and aluminum, the CBAM impact is expected to be felt most acutely in these sectors, with a projected 24% decline in certain exports to the EU. The government's decision to shoulder these costs reflects an urgent need to protect the price competitiveness of Indian goods. As the UK considers implementing its own version of CBAM in 2027, this domestic policy shift provides a critical temporary safety net for small businesses navigating a changing global regulatory environment.