Cutting Russia’s Fossil Fuel Exports: Short-Term Pain for Long-Term Gain

Abstract

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. In this paper, we analyze a scenario whereby most OECD countries put major restrictions on Russia’s energy exports. Results suggest that the short-term implications are likely to be non-trivial for EU – Russia’s largest energy export destination. Households’ real income could drop by 0.7-1.7 percent (relative to the reference case) with energy prices growing by as much as 11 percent. But after the initial adjustment period, the cost of such restrictions for the EU is expected to be more modest over the longer run (0.04 percent slowdown in the annual growth rate of real income over the 2022-2030 period), even as they lead to substantial environmental co-benefits through reductions in CO2 (6.6 percent in 2030) and air pollutant emissions (2.8-5.9 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. By 2030 the cumulative reduction in Russian real income would exceed 1.1 trillion USD, while lost revenue from fossil fuel exports would be almost 1.4 trillion USD. Key words: Russia; Fossil fuel export restrictions; Economic impacts; European Union; Climate mitigation; Environmental co-benefits; Computable general equilibrium. JEL codes: C68, O13, Q43, F17, F18