29 Mar 2022

Optimal tariff versus optimal sanction

The case of European gas imports from Russia

Daniel Gros

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Europe has set itself the aim of reducing its dependency on Russian gas imports. This paper provides an economic analysis of a tariff on imports of natural gas into the EU which would help achieve this goal. The starting point is Gazprom’s monopoly on exports of gas from Russia and pricing power on the European market. Standard trade theory implies that a tariff on Russian gas imports would be beneficial for Europe even on purely economic grounds because it would lower the demand curve Gazprom faces and induce it to lower prices.

The standard linear model used here takes into account the availability of Liquified natural gas (LNG) supplies and confirms the general rule that it pays to levy a tariff on imports from a foreign monopoly. It yields the following numerical results:

  • Only one half of the tariff would result in higher prices for European consumers and the tariff revenue would be more than sufficient to compensate them for this loss.
  • The tariff, which maximises Europe’s welfare, would be close to one third of the price at which Europe would stop importing from Russia. This would cut Gazprom’s net revenues by approximately half.
  • If the tariff is used as a sanctions weapon to reduce revenues for Russia, the tariff should be higher (around 60 %) and would cut Gazprom’s revenues to one fourth of the free trade level.

The overall conclusion is thus that an EU import tariff on Russian gas would have a major impact on Russia’s earning from gas exports and would certainly improve the European terms of trade.