Tariff (or Price Cap) on Russian Oil and Gas Exports as an Alternative to Boycott

A tanker on the high sea

The Economist published an excellent article yesterday about a way to begin gradually cutting off oil and gas revenues to Russia. Since an outright embargo on Russian oil and gas exports appears unlikely, much the same thing could be accomplished by a tariff.

In the limit, a very high tariff would be the same thing as an embargo. A lower tariff allows Europe to wean itself more gradually from Russian oil and gas and provides an economic incentive for markets to seek out other alternatives. It still allows some Russian oil and gas to enter Europe for very high value uses, but it places the social costs of subsidizing Russia’s war against Ukraine on those who want the benefit of using Russian oil and gas. Alternatively, if Russia wants to maintain its current level of oil and gas exports, Russia would have to absorb the cost of the tariff by lowering its prices. Either way Russia gets a smaller revenue stream.

As a side benefit, European countries get a new stream of revenues they can use to offset the impact of high energy costs on their economies. They can use these revenues to lower other taxes or rebate them on a per capita basis to their citizens. As long as they don’t use the revenues to subsidize oil and gas consumption, the European economies will adjust efficiently to reduced supplies of energy from Russia. Ideally countries that impose the tariff could use all or some of the proceeds to arm Ukraine.

Limitations

The good news about a tariff on Russian energy exports is also the bad news. It is gradual. Because it is gradual, it gives Russia more time to adapt.

A tariff also suffers from some of the same limitations as a boycott. Russia can send oil to India and India can export oil to Germany. Unless the tariff is also placed on energy exports from countries that do not, themselves, impose the tariff on Russian energy exports, Russia can, at some expense, evade the tariff. This is less true of Russian natural gas exports, since these generally flow through pipeline systems that cannot be easily redirected. Therefore, to the extent that it can be done, the tariff should apply to Russian energy exports and energy exports from countries that do not impose the tariff on Russia. One side benefit of this approach is that it can induce countries that are currently neutral to embrace the anti-Russian tariff, to protect themselves from having their own exports be subject to the tariff. This gets complicated, but it is certainly worth considering. Perhaps starting with a tariff on Russian gas exports would be a good beginning.

A Price Cap as an Alternative to a Tariff

A tariff on Russian oil and gas exports is a way for Europe to take advantage of the fact that it has a degree of monopsony power over Russia with respect to Europe’s purchases of oil and natural gas. This power is more significant with respect to oil and gas imports via pipelines, since these products cannot easily be redirected to other markets.

A price cap could accomplish the same thing. However, in the case of a price cap the difference in value between the cap and the market price is captured by the importer rather than the importing government. In cases where the government is the importer this is irrelevant. The value of the price cap approach over a tariff is largely cosmetic because it allows the importing government to claim (falsely) that it is not responsible for higher prices. In general, we favor the tariff over the price cap approach as more transparent, but for governments that find the tariff politically unpalatable a price cap is a workable alternative.

Leave a Reply