A fastener and steel products exporter, a typical Indian MSME, was informed by its customers in Denmark and Germany that Carbon Border Adjustment Mechanism (CBAM) reports had become mandatory. Lacking any in-house capacity to comply, the firm hired a consultant at an annual cost of nearly Rs 2 lakh. This became a permanent overhead created overnight by a regulation made in Brussels. The company has since received compliance warnings and reported losing orders. This is not an isolated case.Since January 1, 2026, the European Union’s CBAM has entered its payment phase. This requires EU importers of iron and steel, aluminium, cement, fertilisers, electricity and hydrogen to purchase CBAM certificates corresponding to the carbon emissions embedded in the imported goods. Under the mechanism, importers must register with their national authorities, declare the emissions embedded in their imports annually and surrender the corresponding number of CBAM certificates. The price of these certificates is linked to the weekly average auction price of allowances under the EU Emissions Trading System (EU ETS). If exporters can demonstrate that a carbon price has already been paid in the country of production, the corresponding amount can be deducted from their CBAM liability.The European Union argues that CBAM is intended to prevent “carbon leakage” i.e where companies shift production to countries with weaker climate regulations to avoid paying for emissions. By ensuring imported goods face carbon costs similar to those paid by European producers, the EU is encouraging cleaner production methods and accelerating industrial decarbonisation globally. India, however, is expected to be among the countries significantly affected by the policy. Italy, Belgium and Spain are among the largest European destinations for Indian steel exports, which were valued at around $6.64 billion, accounting for approximately 6.7% of India’s total exports. Thus, the implications of such policy on Indian MSMEs and the global supply chain needed to be observed. The government of India and many other developing countries have consistently maintained that CBAM functions as a non-tariff barrier. The mechanism possesses many characteristics of a non-tariff measure, such as exporters now being required to comply with extensive monitoring, reporting and verification (MRV) requirements, third-party verification and detailed compliance documentation. Saon Ray, professor at the ICRIER, said, “These administrative costs are independent of the tariff itself and, for MSMEs, may exceed the carbon payment.” However, Ray noted, “CBAM cannot be seen as a departure from trade liberalisation. Instead, it should be understood as a non-tariff barrier with more stringent compliance mechanisms operating at the intersection of trade and environmental policy” Ray questioned whether the mechanism will ultimately achieve its stated objective of reducing emissions, noting that the existing academic literature remains inconclusive.Indeed, studies on CBAM’s likely impact on India offer mixed conclusions. The findings of studies assessing the impact of the EU’s CBAM on India remain mixed. An ICRIER paper by Goldar et al. (2026) estimates that CBAM could reduce India’s steel exports to the European Union by around 24%, with the carbon tax burden largely falling on Indian exporters, as India is the largest exporter of iron and steel in the European Union market. Also, the paper finds that CBAM will lead to a reduction of 1% in aggregate emissions in the global steel industry. Contrary to this, Majumder et al. (2024) find that the impact of CBAM on India’s iron and steel exports is likely to be negligible, based on a computable general equilibrium (GTAP-E) model that projects only a marginal decline in exports. Yet, industry representatives argue that the biggest challenge is not reducing emissions but proving how much emissions they have reduced.“Without hesitation, the biggest challenge is data, not technology. Our units are not dirtier than the world believes. They are undocumented. Europe is taxing our paperwork gap as much as our carbon gap,” says Rajiv K. Chawla, chairman of the company Integrated Association of Micro Small & Medium Enterprises of India (IamSMEofIndia).Chawla highlighted that many MSMEs are already investing in cleaner production, but lack the systems needed to prove it. According to his firm’s survey, 41% of responding firms have invested in solar power or energy-efficient equipment over the past two years. Yet only 24% measure their emissions.The problem extends beyond individual firms. A typical exporter often sources components from dozens of small vendors, many of whom do not have machine-level energy meters or systems to measure emissions. Under CBAM, exporters must provide measured and verified product-level emissions data in a prescribed digital format. Without credible MRV systems, firms may be forced to rely on default emissions values prescribed by the EU in Implementing Regulation (EU) 2025/2621. These values are often significantly higher than their actual emissions and increase their carbon liability. Thus, a small workshop employing 15–20 workers is expected to meet reporting and documentation standards comparable to those faced by a billion-dollar steel producer, making the compliance burden disproportionately heavier for MSMEs.This is an alarming paradox. The entrepreneurs are doing their best to reduce carbon emissions but are not keeping track of it. They are cutting carbon through solar rooftops, efficient machines, and cleaner fuels. But because nothing is documented and measured, Europe gives them zero credit and taxes them at punitive default values as if they had done nothing at all. Chawla describes, “It is like a student who has studied hard but doesn’t write the exam. The savings are real, the proof is missing.” Carbon credit trading schemeExperts believe that India’s Carbon Credit Trading Scheme (CCTS) could play an important role in preparing domestic industry for a carbon-constrained global economy, although not immediately. A domestic carbon market can help Indian firms understand carbon pricing, integrate carbon costs into business decisions, improve energy efficiency and gradually reduce the carbon cost differential between India and the European Union. However, the current design of the CCTS primarily focuses on energy-intensive sectors, leaving many MSMEs outside its mandatory scope. Most small firms continue to struggle with product-level emissions MRV systems and third-party certification rather than carbon pricing itself.“The CCTS should be viewed as the foundation of India’s long-term carbon governance architecture rather than a short-term solution to CBAM,” Ray says. “Unless it is complemented by robust MRV systems, affordable transition finance, technology support and targeted capacity-building for MSMEs, the scheme will have limited effectiveness in helping exporters navigate carbon-related trade measures.”Nilanjan Banik, professor at Mahindra University, said, “The CCTS can help in principle but, in practice, its contribution to MSME CBAM readiness is limited before 2026–2027 because the scheme is still being operationalised and its design does not yet fully match CBAM requirements.” Chawla believes the government has recognised the seriousness of the issue but has yet to translate announcements into implementation.“The direction is right, the pace and plumbing are not,” he says.‘Five years from now, they may need a verified carbon footprint’While welcoming the Union government’s proposal to bear up to 90% of MSME compliance costs, he argues that support mechanisms must be operationalised immediately. IamSMEofIndia has called for the creation of a National Carbon MRV Utility, shared government-backed carbon accounting infrastructure, cluster-level measurement centres, subsidised metering, mutual recognition of Indian verification agencies by the European Union, faster implementation of India’s CCTS, expanded green finance for MSMEs and continued negotiations with the EU to secure exemptions for very small exporters.For India’s steel industry, particularly its MSMEs, CBAM changes the very definition of competitiveness. For decades, exporters competed on price, quality and timely delivery. Now, Europe has effectively added a fourth criterion: the ability to prove the carbon footprint of every product.European Union is the destination of 60% of India’s exports of iron and steel. Thus, this sector is expected to be among the most exposed to the mechanism, particularly secondary steel, where MSMEs account for a substantial share of production. Aluminium exporters are also likely to face higher compliance costs because of their dependence on coal-based electricity. Although cement and fertilisers have relatively lower direct exposure to the European market, the gradual expansion of CBAM to downstream products means engineering goods, auto components, fasteners, castings and forgings. These are the backbone of India’s MSME export basket and could eventually come within its ambit.The effects are already cascading through supply chains. Although CBAM formally places obligations on EU importers, European buyers are increasingly asking suppliers further down the chain to provide product-level carbon footprints, energy-source declarations and sustainability certifications. IamSMEofIndia’s survey found that 35% of member firms had already received requests for emissions-related data, either directly from European customers or through Indian firms supplying European markets. Yet none reported receiving any assistance from buyers in understanding CBAM requirements or building compliance capacity.“The carbon questionnaire is becoming the new quality audit,” says Chawla. “Twenty years ago, exporters needed ISO certification to remain competitive. Five years from now, they may need a verified carbon footprint.”While compliance poses an immediate challenge, decarbonising steel production itself will require a gradual technological transition. According to Saon Ray, India will ultimately need to use electric arc furnaces (EAF), hydrogen-based direct reduced iron (H-DRI) and carbon capture, utilisation and storage (CCUS). For small and medium businesses, the best way to go about this for the next ten years is to make incremental changes. This means making their energy use more renewable electricity and using scrap metal in electric arc furnaces when feasible. Investment remains the principal constraint. Many MSMEs lack the financial capacity to adopt cleaner technologies, while the availability of steel scrap, essential for EAF-based production, has become increasingly uncertain because of export restrictions imposed by several countries. At the same time, despite India achieving its Nationally Determined Contribution (NDC) targets ahead of schedule, cleaner sources of electricity still account for a relatively small share of the country’s overall energy mix.In effect, CBAM has become a sorting mechanism for Indian exporters. It is dividing Indian MSMEs into those who can credibly demonstrate their carbon footprint and those that cannot. Falak Ali was an editorial intern at The Wire.