Don’t ban Russian energy, tax it
The run for more morality in geopolitics following the brutal invasion of Ukraine by Russia is laudable, in view of the war crimes committed by its army and the absence of legitimacy of its actions. I, like many others, did feel the pain and the anxiety of seeing a new war in Europe that beat 75 years of peace, and a rapprochement of the belligerents, including Russia. The question is whether banning energy imports is the right answer.
Energy as a common good.
The creation of what is today’s planet earth has unevenly distributed sources of energy around the globe. There is unfortunately no way to change that situation.
Recently however, in a search of a better use of those resources, we have expanded our search for alternatives that are less polluting, more local, and widespread. It is a secular drive for climate change that is fueling this movement.
The chessboard of today’s sources of energy includes fossil fuels, hydro, uranium, wind, solar. It is an increasingly complex equation with multiple choices, not to mention the derivatives.
It would be naïve to expect from those who sit on those resources to share them generously; it is, for all practical purpose, a market and a nest of interests. It was naïve to believe that, because it is a mutual interest, the energy producers would not abuse their dominant position: there is a long history of such actions. The extraordinary earnings of the world’s oil companies are a demonstration of the advantage they are taking from the current situation.
The key word is diversification of the sources of energy. Russia, in a way, has undermined its dominant position and accelerates their geographic diversification. One of the many ways Vladimir Putin has shot his country in the foot.
Banning will backfire.
Banning Russian energy has to be analyzed in a context of mutual interest.
It makes no sense to ask Germany to spend $ 180 billion to replace Russian energy imports. The same as it made no sense to ask India and China to renounce to their only source of domestic energy: coal.
Is it acceptable to see Ukraine block the gas pipeline that crosses its country and reduce the gas going to Western Europe?
Banning is brutal and immediate: it creates huge disruption. Do we want a cold winter without heating? A hot summer without air conditioning? Do we want industrial companies to stop producing their goods because they cannot get enough energy? Do we want the rich to access energy while the poor will freeze?
It will inevitably increase inequality through recession and privation.
Taxing Russian energy is the right answer
The benefits of import duties are unquestionable.
· Russian energy will become more expensive than other sources
· This in turn will accelerate the search for alternatives
· It provides resources to Governments to reduce their own taxes
How will Russia react?
They will be between a rock and a hard place: either they accept to see an immediate reduction of their sales of gas, oil and coal or they reduce their prices to be competitive.
· Their immediate revenues decrease either through lower sales or lower prices
· The long-term trend towards independence from Russian energy will reduce the country’s ability to import other goods and services that they need to get from abroad
· It will undermine Russia’s military capabilities for the long run
For this to work
Some tricky but surmountable hurdles have to be crossed. The first one is to accept that Europe, as the main importer of this energy, supported by the United States, is not aiming at starving or debilitating the Russian population and the country itself.
The second hurdle is to accept that there is no immediate solution that would not boomerang on the world energy markets, and Europe’s needs for energy.
The third one -and the most challenging- is to convince Russia that it is in its best interest to allow a flow of energy that is not politicized as it just was when Putin threatened to cut the supplies of Poland and Bulgaria. It requires a serious pressure on Putin by its own entourage to show that, even if the cost for Europe will be huge, it can survive and put Russia’s economy in even deeper recession. Does he still listen to any form of rationality?
The fourth one is the need to form a consensus among the buyers of Russian energy: in particular, the European Union has to come together to look at a sensible allocation of the tax benefits based on the final purchasing country. It goes, however, beyond Europe and conversations with the United States, China and India need to achieve a level playing field that does not undercut that taxation.
Is it impossible? Based on the fact that any other solution is worse, I continue to believe that it would be a politically and economically better path, at least for the next few years.