Insight
A G7 energy tariff on Russia would be better than a price cap by Elisabetta Cornago, 11 July 2022 A price cap on Russian oil would cut Russia’s income, but a tariff would help governments support households and businesses dealing with high energy prices. Following Russia’s invasion of Ukraine on February 24th, G7 countries responded by rapidly approving a series of economic sanctions. Canada was the first to ban Russian oil imports (which were already zero) on February 28th, followed by the US embargoing Russian coal, oil and gas in early March. The UK vowed to phase out Russian oil imports by the end of 2022. EU member-states banned imports of Russian coal on April 8th , followed by oil delivered by sea on May 31st. In response, Russia has weaponised its gas exports, demanding payments in roubles and stopping or reducing flows to EU member-states. How have European energy markets reacted to this turmoil? How can European governments and G7 allies cut the revenues Russia gets from energy trade, while securing gas supplies? What is the status of European energy markets? A perfect storm of factors pushed up gas prices in autumn 2021, which in turn increased electricity prices: economic recovery after Covid-19 lockdowns raised energy consumption; and supply was reduced by unplanned maintenance of gas infrastructure, the deliberate slow-down of Russian gas supplies to Europe, and abnormally low wind power generation. At the time, the Commission insisted that the price spike would be temporary given the transient nature of most of these shocks. After Russia’s invasion of Ukraine, however, the outlook changed: imports of Russian coal and seaborne oil are on the way out, probably permanently. But the long lead times to full implementation of these sanctions, together with Russia’s reduced gas exports, have only increased global energy prices. This is because markets prepare for possible shortages and the uncertainty around them: energy futures markets for coal, gas and oil point towards a prolonged period of high prices. Economic sanctions on the energy sector are aimed at reducing Russian revenues, but so far they have primarily led to higher global energy prices, partly benefiting Russia. The EU ban on coal imports from Russia only slightly reduced Russian revenues, because these imports are relatively modest, at €8 billion per year. The ban will start at the beginning of August. At the same CER INSIGHT: A G7 energy tariff on Russia would be better than a price cap 11 July 2022
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