EU Gas Import Tariff Under Duopoly: A Contribution to the Energy Sanctions Debate on Russia

The Russo-Ukrainian war has triggered a debate about the adequate sanctioning policy options available to Germany and the European Union, respectively: Ideally, sanctions should impose considerable economic costs on Russia and contribute to a reduction of the Russian government's ability and willingness to continue its military aggression against Ukraine. Two options are discussed, namely an embargo on Russian exports of fossil fuels and an import tariff. If European policymakers want to consider the option of a gas import tariff on Russian exports, the pros and cons of such a policy option clearly have to take the following into consideration: Firstly, the impact on Russia - in particular the effects on Russia's budget revenue - and Gazprom as the largely state-owned dominant gas exporter. Secondly, the analysis has to focus on the effects on consumers of imported natural gas in the European Union. Proponents of an import tariff allude to optimal tariff theory and argue that such a policy would shift the burden primarily towards the exporters of fossil fuels, because of tariff revenues accruing to EU households. To understand the price and quantity effects of an EU gas import embargo vis-à-vis Russia, an adequate theoretical framework is required: While one might consider a monopoly framework - with Gazprom as the only supplier in the EU - there are good arguments that a duopoly (or oligopoly) market structure analysis is more useful to derive the key effects of an EU import tariff since such an approach allows to take into account windfall gains for competitors, the consideration of cost differentials between suppliers and the possibility of changes in market leadership. We consider the effect of revenue maximizing tariffs for both the case in which Gazprom retains and loses its market leadership position. The tariff maximizing tariff would significantly reduce the market share of Gazprom and Gazprom would only partially increase gas prices, namely by 50% of the tariff if leadership is maintained and by 25% if leadership is lost. However competitors would also increase their price mark ups, with a stronger increase if competitors become market leaders. The increase of price mark ups and the decline of the market share of Gazprom make it more difficult to raise sufficient tariff revenues from Gazprom in order to compensate EU consumers, compared to the monopoly case.