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As the CBAM comes into force, India’s steel MSMEs face rising costs, shrinking market access, and an urgent need for a tailored decarbonisation pathway to remain competitive in global supply chains.
Image Source: Buena Vista Images/ via Getty
The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) aims to level the playing field by placing a carbon price on high-emission imports, particularly from sectors such as cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Starting January 2026, it will push global producers, entering the EU, to pay the same price for carbon as EU-based manufacturers, so that the bloc’s climate ambitions aren’t undercut by cheaper, high-emission imports. While over 99 percent of emissions from CBAM-covered goods currently fall under the mechanism’s purview, small exporters — those exporting under 50 tonnes — are temporarily exempt. However, this relief is fleeting.
In this context, India’s micro, small, and medium enterprises (MSMEs), which power nearly 46 percent of the country’s exports, may appear shielded on paper. In reality, many operate in carbon-intensive industries and are embedded in EU-linked supply chains, often as Tier 2 and Tier 3 suppliers to large exporters.
While over 99 percent of emissions from CBAM-covered goods currently fall under the mechanism’s purview, small exporters — those exporting under 50 tonnes — are temporarily exempt. However, this relief is fleeting.
In 2022, India exported US$31 billion worth of iron, steel, and cement (sectors directly targeted by CBAM), with about a quarter of that bound for the EU. These industries are deeply intertwined with India’s MSME ecosystem, which has rapidly scaled up its global footprint. Between 2020–21 and 2024–25, the number of exporting MSMEs tripled to 1.7 lakh, and their overall exports surged to US$148.7 billion. As CBAM enforcement nears, this growing segment finds itself increasingly exposed to carbon-related trade risks. As large firms decarbonise to stay competitive, their downstream suppliers will face pressure to comply or risk losing access to markets.
This piece argues that India must equip its MSMEs for a low-carbon future. Without the right tools, such as renewable power, green hydrogen, and scrap-based raw materials, these enterprises risk being cut out of global value chains. CBAM isn’t just a climate regulation; it’s a signal of where trade is headed.
Figure 1: The Growing Burden on MSMEs
Source: Author’s Creation
As India’s large corporations sprint ahead with green investments, hydrogen pilots, and carbon disclosure systems, a silent divide is widening. MSMEs, the bedrock of India’s industrial ecosystem, are largely absent from this journey. And that absence comes with a cost.
Take the engineering goods sector: in 2022–23, MSMEs contributed nearly 20 percent of total exports, valued at over US$24 billion. Industrial clusters like Rajkot, Coimbatore, and Mandi Gobindgarh are dotted with small foundries and rolling mills, often outdated and coal-reliant. While many of these units technically fall below the EU’s 50-tonne CBAM reporting threshold, that exemption is misleading.
When Tier 1 suppliers commit to carbon accountability, pressure trickles down to every link in the chain. Tier 2 and Tier 3 MSMEs must comply or risk falling off the map. With the EU set to review the de minimis clause post-2026, tightening is likely, not optional.
Why? Because aggregators and merchant exporters often consolidate shipments that cross the cap. And more importantly, it’s not EU regulators but global buyers who are setting the pace. When Tier 1 suppliers commit to carbon accountability, pressure trickles down to every link in the chain. Tier 2 and Tier 3 MSMEs must comply or risk falling off the map. With the EU set to review the de minimis clause post-2026, tightening is likely, not optional.
The steel industry (given its scale, carbon intensity, and deep MSME linkages) offers a telling case. India’s primary steelmaking route, blast furnace-basic oxygen furnace (BF-BOF), is carbon-intensive and dominated by a few large firms. The secondary route, using Induction Furnace (IF) and Electric Arc Furnace(EAF), relies on either scrap steel or Direct Reduced Iron (DRI) and contributes around 55 percent of India’s steel output. Within this, as of 2022, more than 1,200 small and medium-sized steel re-rolling mills (SRRMs) were producing 33 MT annually, supporting 400,000 jobs. Yet the dominant technology, coal-based DRI, is fundamentally at odds with decarbonisation. It currently accounts for 37 MTPA of output, and under the National Steel Policy 2017, that number is set to rise. By 2030, India aims for 80 MTPA of DRI production, 70 percent of which is projected to remain coal-based. This puts nearly 80 percent of bar exports, largely sourced from the secondary steel sector, at risk of falling short on green credentials.
Figure 2: Classification of Steel Production in India
Source: Bureau Of Energy Efficiency
The real threat to MSMEs isn’t legal decarbonisation enforcement, it’s the market. Global supply chains are evolving, and MSMEs risk being left behind not for failing to comply, but because they were never given the tools to compete. Decarbonisation, if not inclusive, may widen fault lines in India’s industrial future. A one-size-fits-all industrial policy won’t be enough; MSMEs need a tailored transition strategy, one that meets them where they are, not where the top-tier players already stand.
India’s small and medium SRRMs produce 33 MT of steel annually, consuming around 2.1 MTOE. Coal still accounts for nearly 59 percent of this energy use. In clusters across Punjab, Gujarat, and Tamil Nadu, most units continue to rely on outdated, coal-fired furnaces. Only a few have transitioned to cleaner fuels like piped natural gas.
Figure 3: Energy Consumption of MSMEs’ Steel Re-Rolling Units in India
Source: Bureau Of Energy Efficiency
A realistic decarbonisation pathway lies in accelerating the adoption of EAFs, particularly scrap-based ones powered by renewable energy. EAFs can reduce CO₂ emissions and energy use by over 60 percent compared to blast furnaces, while also conserving raw materials like iron ore, coking coal, and limestone.
Many MSMEs already operate in scrap-rich zones, making the transition feasible. However, the challenge lies in sourcing quality scrap. India, still developing its scrap economy, relies heavily on imports from the US, UK, and UAE. India is the world’s second-largest importer of recycled steel scraps, following Turkey. As countries like the UAE tighten export norms to support their own green push, India’s supply chains may face additional strain.
A realistic decarbonisation pathway lies in accelerating the adoption of EAFs, particularly scrap-based ones powered by renewable energy.
The shift toward modular, small-scale EAFs embedded within industrial clusters can accelerate this transformation. These shared EAF facilities, powered by renewable electricity and, eventually, green hydrogen, offer MSMEs a low-capex, scalable alternative to carbon capture or blast furnace retrofits. This allows MSMEs to become active contributors to decarbonised value chains, rather than depending on trickle-down green investments.
India’s steel transition must reflect the heterogeneity of its producers. A decentralised, scrap-based production ecosystem, tailored for MSMEs, isn’t just necessary for climate goals; it’s essential for their continued relevance in a low-carbon global economy.
In a world where carbon is becoming a cost and green credentials become a qualifier, the survival of MSMEs isn’t just a climate issue; it’s an economic necessity. CBAM’s exemptions may offer short-term breathing space, but they won’t protect MSMEs from the deeper structural changes underway. Where around 23 percent of global emissions are embedded in traded goods, Indian MSMEs risk being locked out unless they decarbonise.
With the right support, they can move away from outdated, coal-reliant processes to cleaner technologies like modular EAFs, scrap-based production, and green hydrogen heating. These aren’t just compliance tools, they’re stepping stones toward securing India’s relevance in climate-aligned trade. India’s goal of achieving 300 MT of steel production by 2030–31 in tandem with a green transition is only plausible if the country’s smallest producers are placed at the centre of this effort, not at its margins.
Manini is a Research Assistant with the Centre for Economy and Growth at the Observer Research Foundation.
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Manini is a Research Assistant at the Centre for Economy and Growth, ORF New Delhi. Her research focuses on the intersection of geopolitics with international ...
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