Cutting Russia's fossil fuel exports: Short‐term economic pain for long‐term environmental gain

In response to the invasion of Ukraine, most OECD countries have announced punishing sanctions against Russia. In addition to targeting financial markets and service sectors, some countries have begun to impose restrictions on exports of Russia's fossil fuels. We analyse a scenario whereby most OECD countries put major restrictions on Russia's energy exports. The short‐term implications are likely to be non‐trivial for the EU – Russia's largest energy export destination. Households' real income could drop by 0.7 to 1.7 percent (relative to the reference case) with energy prices growing by as much as 11 percent. But in the longer run, the cost of such restrictions for the EU is expected to be more modest (0.04 percent slowdown in the annual growth rate of real income over the 2022–2030 period), even as they lead to substantial environmental benefits reducing CO2 (6.6 percent in 2030) and air pollutant emissions (2.8 to 5.9 percent in 2030). Such emission reductions would take the EU more than halfway to its Green Deal mitigation target, reducing the necessary carbon price by around 40 EUR per tCO2. Adverse impacts on the Russian economy would be overwhelming and, in relative terms, 10 time larger than that for EU.