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Speech by François Lévêque at the conference organised by the Association of Energy Economists (AEE) on 24 March
Posted on 28 March 2022

This conference, organised at the Ecole des Mines, brought together energy economists who questioned the impact that this war has, and will have on the European Union's energy supply.

Exactly one month ago (24 February 2022) war started in Ukraine and today both a NATO summit and a G7 summit are taking place.

François Lévêque, professor at CERNA-i3, discusses the different types of solutions to reduce Russian gas imports in the short term.

The immediate total embargo is one of the solutions mentioned by economists and the media. One of the solutions envisaged to reduce gas imports from Russia would be an immediate total embargo, which is not reasonable because it requires, on the one hand, a minimum of preparation and on the other hand, it is a game and a single blow unlike a partial reduction of imports which allows to reduce by stages.

Another solution envisaged would be the establishment of an escrow account. This solution is supported by Ukraine. Gas buyers would continue to pay for their gas but the revenues would be paid into a frozen account according to pre-determined conditions. The account would be unfrozen if there was a ceasefire. Many believe that Russia will never accept changes in payment conditions and the establishment of such an account. However, in terms of game theory, i.e. the strategic interactions of agents, this solution deserves to be studied closely.

Two types of intervention are possible: price intervention and quantity intervention to reduce Russian gas imports and thus, above all, the revenues benefiting Vladimir Putin's regime.

Price interventions can be made in different ways. A first intervention would be the introduction of a specific EU tax. By increasing the price of Russian gas, the tax would have the effect of reducing Gazprom's deliveries and favouring untaxed gas from elsewhere. Less revenue for Vladimir Putin as a result. The promoters of this solution would like the proceeds of the tax to be transferred to a solidarity fund for Ukraine and refugees. However, this solution has not been considered any further, as the question of the amount of the tax and the effects on quantities are still pending.

Another solution would be a public intervention on the price, which would consist in setting a ceiling on the price of wholesale gas markets in Europe. The major disadvantage of such a measure is that it would indiscriminately reduce the revenues of the various exporters, Russia of course, but also Algeria and Norway. The disadvantage would also be that there is no effect on demand. Demand will be higher than if there was no price cap. But this price cap measure is more a consumer protection measure for both households and industries than a measure to reduce Russian imports.

As far as quantities are concerned, two solutions exist: a centralised solution or a decentralised solution. In the case of the centralised solution, the single European buyer would cap its purchases and redistribute the stock to all member countries, similar to the centralised purchases of SARS-CoV-2 vaccines.  The rule for allocating gas quotas cannot, however, be as simple as an allocation based on the number of inhabitants in each country as for the vaccine.

The decentralised solution would consist of a reduction in the purchase of its quantities by each state according to its possibilities and the pressure of its public opinion. Without a minimum of coordination from Brussels, there is a risk that the country will achieve a rather small reduction. There is no ideal solution. The solution adopted will probably consist of a combination of instruments.

In conclusion, it is a bargain between the buying companies and the exporting country. To be successful, market power must be built and a coalition and coordination between the buyers must be established. The alternative proposal will have to be credible so that the bargaining power is more in favour of the buyer. The instruments, prices and taxes, will have to be favoured without forgetting to study the sequestration solution.

The conference was attended by Anne-Sophie Corbeau, Research Scholar, Columbia University; Jean-Claude Mallet, Public Affairs Director, Total Energies, Jacques Percebois , Professor Emeritus, University of Montpellier, Georg Zachmann, Senior Fellow, Bruegel and François Lévêque, Professor of Economics, Mines-ParisTech

To find out more, read the article by François Lévêque, "Embargo total ou partiel, consommer moins… Quelles solutions pour couper dans les importations gazières de Russie ?" published in The Conversation

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