A parliamentary committee has asked the government to seek postponement of the application of the European Union’s Carbon Border Adjustment Mechanism (CBAM) to the Micro, Small & Medium Enterprises (MSME) sector by at least three years.

In a recent report, the Standing Committee on Commerce expressed concern over the potential hindrances posed by tariff and non-tariff barriers raised by the EU and the U.S., which could impede the growth of the MSME sector.

Early last year, India and China expressed concern over CBAM at the World Trade Organization (WTO). The issue is likely to figure at the WTO’s Ministerial Conference to be held in Abu Dhabi from February 26 to 29.

While acknowledging the noteworthy role played by engineering exports in the overall merchandise exports of India and the prospect of achieving the $300 billion export target by 2030, the standing committee felt that Indian manufacturers in the MSME sector may not have the financial resources to make changes to overcome the challenge posed by CBAM.

To protect the MSME sector from the U.S.’ Expansion Act of 1962 and non-tariff barriers in the form of CBAM, the committee recommended that the government engage at the highest level with the U.S. and EU, respectively, to resolve the matter.

It also recommended putting in place a robust mechanism to support and equip MSMEs to counter the adverse effects of CBAM.

With the European Commission adopting the rules governing the implementation of the carbon tariff on imported goods, the transitional phase of CBAM started last October. It will be in force until the end of 2025, with full implementation starting in 2026. CBAM will initially apply to imported products and commodities like cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.

The carbon tariff measure has governments and exporters of goods from countries outside the EU worried because they fear their competitiveness will be adversely impacted by having to pay a price for the carbon emissions generated during the manufacture of goods. The tariffs on goods manufactured by hard-to-abate sectors like steel and cement are expected to be as high as 35%.

Besides manufacturers in the MSME sector, the Indian steel industry is also likely to face negative consequences of the EU’s carbon tariff measure.