Optimal tariff versus optimal sanction – CEPS


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

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

  • Only half of the tariff would result in higher prices for European consumers and the tariff revenue would be more than enough to compensate for this loss.
  • The tariff, which maximizes Europe’s welfare, would be close to a third of the price at which Europe would stop importing from Russia. This would cut Gazprom’s net income by about half.
  • If the tariff is used as a sanction weapon to reduce Russia’s revenue, the tariff would have to be higher (around 60%) and would reduce Gazprom’s revenue to a quarter of the free trade level.

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

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