Europe should tax Russian gas, not ban it

Germany’s reluctance to impose an absolute ban is understandable. It imports almost all of its gas, and supply from Russia usually accounts for about half. Sources are difficult to switch (harder than oil or coal) because the supporting infrastructure is relatively fixed. Businesses and consumers can adapt over time, buy different fuels or save, but still: one estimate suggests that an abrupt end to Russian supplies would cut Germany’s gross domestic product by 2 to 3 percent. (By comparison, the pandemic caused a drop of about 4.5%.)

Daniel Gros from the Center for European Policy Studies advocates high tariffs instead of a complete ban. His logic is convincing. A tariff would raise prices for Europe’s consumers, but they wouldn’t have to pay the full cost. To maximize its profits, Gazprom would need to absorb some of the surge. In fact, the tariff would reap part of what he calls his pension – which is the difference between what he gets paid and his production costs. Europe could then use that tariff revenue for other purposes, including compensating consumers for having to buy more expensive gas.

The ideal tariff would be calculated in two steps. First, calculate what maximizes the difference between the revenues generated and the economic losses imposed on consumers; Second, consider the desire to punish Russia beyond what this first calculation requires. For example, suppose Europe were willing to give up one euro of net economic gain to increase Russia’s penalty by one euro: Gros calculates that the tariff would be 60%.

Such a high tax would be enough to cut the revenues of Gazprom, Russia’s sole gas supplier, by more than three-quarters. The fall in the amount of Russian gas imported would be much smaller, lessening the initial blow to consumers, and the revenue generated would still be enough to keep Europe’s consumers sane. By making Russian gas more expensive for consumers, the tax would also create long-term incentives to switch to other suppliers.

What speaks against it? It’s hard to see one. While at first glance discriminatory tariffs of this kind are illegal under World Trade Organization terms, the rules provide for a national security exception. Russia’s war on Ukraine, not to mention threatening nuclear retaliation against its allies, seems a possibility. Perhaps Russia would sue for legal remedies and present itself as a defender of international laws and norms. That would at least be worth a laugh.

More likely, Russia would retaliate by cutting off supplies. But things could still be moving in that direction. Russia recently asked the EU to pay for its gas in rubles, which would help prop up Russia’s currency and circumvent sanctions on its central bank. So far, Europe has said no, and Germany is now wondering about rationing in anticipation of a ban imposed not by Europe but by Russia. If Europe imposes a punitive tariff and Russia then cuts off supplies, Germany and its partners would indeed be harmed, although not as badly as Russia. In fact, Russian President Vladimir Putin would impose much tougher sanctions on himself.

For now, the main channel allowing Russia to avoid the full impact of Allied sanctions – the gas market – remains open. As long as this is true, Europe should see a gas tariff, not a ban, as the cheapest way to hurt the Russian economy.

Related at Bloomberg Opinion:

• Oil, gas and commodities will not be armed – for now: Javier Blas

• Reducing dependence on Russian energy is more realistic than you think: Liam Denning

• Russia is no longer Europe’s reliable gas supplier: Julian Lee

• Russia needs European money more than Europe needs Russian gas: David Fickling

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Clive Crook is a columnist for Bloomberg Opinion and a member of the Economics, Finance and Politics editorial board. A former chief commentator for the Financial Times in Washington, he was an editor for the Economist and the Atlantic.

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