Govt to absorb 90% of MSMEs' compliance cost for EU carbon tax (CBAM)

📌 Summary:

• The Centre is working on a scheme to absorb 90% of the compliance cost borne by MSMEs under the EU's Carbon Border Adjustment Mechanism (CBAM), in force since January 1, 2026
• CBAM puts a price on carbon emitted in producing carbon-intensive goods (steel, aluminium, cement, fertilisers) entering the EU; the UK plans its own version from 2027
• India's efforts to win a concession for small industries in trade talks failed; per-MSME compliance cost alone is Rs 15-20 lakh, with units lacking the data systems to report embedded (direct + indirect) emissions
• Where exporters cannot provide actual data, the EU applies "default values" with a punitive mark-up: 10% (2026), 20% (2027), 30% (2028 onward)
• These are largely fixed costs that do not scale with business size, so MSMEs bear a disproportionately higher burden, eroding price competitiveness and potentially making EU access "commercially unviable"
• India is the world's second-largest producer of crude steel and primary aluminium — sectors most exposed
• ICRIER working paper: EU imports of Indian CBAM goods could fall ~24% for iron & steel (the worst-hit), followed by fertilisers, aluminium and metal products; India's global iron & steel exports could fall 5.7%

🎯 UPSC Relevance: GS3 (Economy) — non-tariff barriers and green protectionism, climate-trade linkage, MSME competitiveness, and the CBDR (Common But Differentiated Responsibilities) tension between climate goals and developing-country trade.

📝 Prelims Facts:

• CBAM = Carbon Border Adjustment Mechanism (EU); in force from January 1, 2026
• Covered sectors: iron & steel, aluminium, cement, fertilisers (plus hydrogen, electricity)
• Default-value mark-ups: 10% (2026) → 20% (2027) → 30% (2028+)
• India is the 2nd-largest producer of crude steel and primary aluminium; ICRIER projected ~24% drop in EU iron & steel imports from India

🔑 Key Term: Carbon Border Adjustment Mechanism (CBAM) — an EU levy on the embedded carbon emissions of imported goods, designed to prevent "carbon leakage" by equalising the carbon price between domestic and imported products.