CBAM's Financial Phase Has Begun: Why Indian MSME Exporters Can't Wait Any Longer

The European Union's Carbon Border Adjustment Mechanism (CBAM) has moved from a reporting obligation into something that hits the balance sheet directly. As the financial phase takes effect in 2026, carbon pricing is no longer a compliance checkbox for Indian exporters — it is starting to decide who stays competitive in the EU market and who doesn't.

At PHDCCI's Carbon Shift India 2026 conference, the divide in readiness became hard to ignore. R.R. Rashmi, Distinguished Fellow at The Energy and Resources Institute (TERI), pointed out that while large steel and aluminium producers have at least some financial and technical capacity to absorb CBAM's demands, small and medium exporters have neither the resources nor the internal systems to measure and report carbon intensity the way EU regulations require.

Ravinder Bhan of the Indian Steel Association framed the underlying issue bluntly: CBAM functions less like an environmental levy and more like a tax that rewards EU producers who've already modernized, while requiring costly foreign-accredited audits from everyone else. For an MSME running on thin margins, the price of hiring an EU-accredited auditor to certify emissions data can be prohibitive before a single shipment even ships.

The compliance gap is real — and it's structural

This isn't a paperwork problem that a spreadsheet template can fix. It's a data infrastructure problem. Most Indian manufacturers, especially MSMEs, don't have systems in place to track Scope 1 and Scope 2 emissions at the level of granularity CBAM demands — by product, by process, tied to verifiable grid emission factors.

Jatinder Singh, Deputy Secretary General at PHDCCI, argued that government-backed monitoring technology at the point of manufacturing is the only realistic way for smaller exporters to close this gap. Rashmi went further, calling for a national capacity-building fund and a mutual recognition arrangement between EU verification bodies and India's own Export Inspection Council — so exporters aren't paying twice for the same certification.

Until that kind of infrastructure exists at the policy level, the burden of proof sits with individual exporters. That means the tools they use to calculate and report emissions matter more than ever.

Why India's own carbon market changes the calculus

There's a second piece to this story that doesn't get enough attention: what Indian exporters do domestically can directly reduce what they owe at the EU border.

Narendra Prajapati, CEO of MicroEnergy Credits, laid out the mechanism clearly — CBAM allows a deduction where an effective carbon price has already been paid in the country of origin, provided it can be demonstrated under EU rules. India's Carbon Credit Trading Scheme (CCTS) is the framework meant to make that demonstrable. It won't let exporters substitute Indian carbon credits directly for CBAM certificates, but a credible domestic carbon price can shrink the gap that has to be paid to the EU.