Non-compliance could erode markets abroad. Many may even have to shut shop. Large-scale job losses could be on the anvil too.

MSMEs have now sought Mutual Recognition Agreements (MRAs) between India and the EU to cut down the burden of carbon-linked trade barriers to the EU.  An MRA is an official treaty that allows two or more countries to recognise and accept each other's conformity assessments and certifications.

Shrinath Dakare, CEO and Co-Founder of Optiflux, an MSME, told The Secretariat, “Beyond policy, the focus must be on MRAs to ensure Indian carbon credits are accepted by EU regulators.”

The implementation of CBAM - short for Carbon Border Adjustment Mechanism – kicked in this year, making carbon emissions not just an environmental concern but a direct cost of doing business.

According to “Carbon as a Business Variable: Trade, Risk, and the Evolution of India’s Carbon Market”, a report by the think tank Rubix, CBAM-linked carbon costs could reach EUR 60-100 per tonne of CO2. It means a tax on carbon intensive goods that would make production costs rise.

Production costs related to emissions reporting, verification, and carbon accounting could increase by 5%–8% for Indian MSMEs, says the Global Trade Research Initiative. This comes at a time when the surge in raw material cost due to the West Asia conflict has already eroded bottomlines.

MSMEs in auto components, engineering goods, speciality steel, textiles, and industrial machinery have been worst affected. Indian aluminium exports reportedly fell 41% year-on-year in January 2026 under rising CBAM pressure.

What MSMEs Want

India’s bilateral trade with the EU stood at US$ 105.22 billion during April–December FY 2025-26, of which India’s exports to the EU were US $55.20 billion, as per the Ministry of Commerce and Industry.

India has 7.94 crore MSMEs, of which 173,350 are involved in exports, according to official data.

Dakare said that Indian industries are responding to CBAM with unprecedented capital reallocation, but government support can increase its impact manifold.

“Domestically, the government can bridge the cost gap for green hydrogen through the Strategic Interventions for Green Hydrogen Transition (SIGHT) programme and provide concessional finance for MSMEs to adopt standardised carbon-accounting software,” Dakare said.  

“Turning the CBAM threat into an opportunity requires a synchronised, team India, approach between trade negotiators, the Ministry of Power, and heavy industry,” he said.

Tensions are running high for traders and exporters. Recommendations made by the European Parliament Committee on the Environment, Climate and Food Safety could expand the scope of CBAM.

According to the European Commission, about 180 additional aluminium and steel-based items could be included under CBAM starting January 1, 2028.

This could further increase the cost of production for MSMEs, which in turn will threaten their competitiveness in the EU export market. It could also lead to unemployment in the sector, which is the second-largest employer in India after agriculture.

Are Government Initiatives Working?

India has already come up with the Carbon Credit Trading Scheme (CCTS), which is helping industries reduce their carbon emission so that they do not face high CBAM taxes.

Carbon credit is a certificate that gives the right to emit 1 tonne of carbon dioxide. Under CCTS, companies that reduce pollution can earn carbon credits, and companies that pollute more may have to buy them.

Saurabh Sanyal, ASSOCHAM Secretary General, said the government was moving strategically. “Through CCTS, National Green Hydrogen Mission, and PLI, India can deal with the CBAM policy better by shifting to cleaner energy, improving energy efficiency, and using low-carbon technologies with support through subsidies, low-interest loans, and technology partnerships.”

The impact of CCTS, however, has so far been limited.

Anil Bhardwaj, Secretary General of the Federation of Indian MSMEs (FISME), on the other hand, said, “While CCTS is an important initiative by the government, it is not being used extensively by MSMEs as of now. Only those involved in steel and cement are using it.”

Between 2010 and April 2025, India issued over 375 million carbon credits. Typically, these credits are bought by international companies and governments to compensate for their own emissions.

Stoking Demand

Many exporters in the textile industry are starting to cater to the domestic market as they see challenges in the global export market.

Kamal Kishore Kumawat, Co-founder and CTO of Edgistify, a supply chain solution, said, “Not just CBAM, but due to the war in West Asia, at least 20% of exporters have started making finished products for the domestic market instead of focusing on foreign export.”

What Are Other Countries Doing To Deal With CBAM

India’s primary competitors in the EU export market are China, Bangladesh, and Vietnam.

China - 13% of its exports go to EU - is responding to CBAM through a mix of industrial policy, carbon market expansion, and export-sector decarbonisation.

In 2025, China brought steel, cement, and aluminium into its Emissions Trading System  — sectors directly exposed to CBAM. This dramatically increased the coverage of China’s carbon market. China is also planning to move toward absolute emissions caps from 2027, closer to the European model.

Of Vietnam’s total exports, 12% are to EU. Vietnam’s government has assigned the Ministry of Industry and Trade to coordinate a national response plan for CBAM, especially for steel, aluminium, cement and fertiliser exports.

Bangladesh, for which EU is the single largest export destination, sending 45%-50% of its exports there, is still at an early stage of CBAM preparedness. Bangladesh’s biggest strategic response has been to accelerate “green manufacturing” in the textile and apparel sector. The country already hosts one of the world’s largest numbers of Leadership in Energy and Environmental Design (LEED) certified green garment factories.

If India’s MSMEs become CBAM-compliant faster than regional competitors, it could bring gains in the export market share across sectors, from auto components to textiles to industrial machinery.