Import tariffs: an alternative to a European energy embargo against Russia

Tariffs on Russian energy imports could provide the EU with a lever to reduce Russia’s financial gains from its oil and gas exports and allow it to flexibly react to Moscow’s actions in Ukraine, a team of economists from the European think tank Bruegel, Harvard, and the University of Cologne propose in a letter to Science and in a working paper. Among the authors is the University of Cologne’s energy and market design expert Professor Dr Axel Ockenfels.

Russia is the world’s biggest exporter of fossil fuels. The country derives most of its hard currency revenues from the energy business, which serves to stabilize its economy and government. The European Union is the biggest buyer of Russian energy exports, purchasing 75 per cent of Russian gas and 50 per cent of Russian oil. Because energy supplies are tied to a pipeline and terminal infrastructure, Russia would not be able to quickly and flexibly find new customers – such as India or China – in the event of a European energy embargo. In economics, a case like this is referred to as inelastic supply.

But many EU member states also need time to break free from their dependence on Russian oil and gas. In this context, the team proposes flexible import tariffs, which would reduce Russia’s energy revenues without necessarily stopping the energy inflow. Moreover, it would be easier for EU member states to agree on such a measure than on a total import freeze.

‘A significant advantage of import tariffs would be that they can be flexibly and strategically adapted to the economic and political dynamics of the conflict,’ said Ockenfels. ‘Moreover, such tariffs could prove to be a valuable tool in our mid- and long-term efforts to become more independent of Russian oil and gas.’ In a correspondence published in Nature, Ockenfels and two co-authors also outlined various options to reduce the risk of Russian retaliation to European tariffs.

In order to strengthen its position, the authors argue, the EU should furthermore make its energy demand more elastic in the short term by providing greater incentives for other energy sources to replace oil and gas, and through efforts to generally reduce demand. They are confident, however, that a bold European energy strategy could feasibly deprive Russia of its financial basis for the war against Ukraine.

Publications:

Letter in Science:

http://www.science.org/doi/10.1126/science.abq4436

Correspondence in Nature:

https://www.nature.com/articles/d41586-022-01008-3

Bruegel working paper:

https://www.bruegel.org/2022/04/cutting-putins-energy-rent-smart-sanctioning-russian-oil-and-gas-2