Price cap versus tariffs: The case of the EU-Russia gas market

To counter rising gas prices and corresponding Russian profits, many scholars point to import tariffs on Russian gas as a preferred policy instrument. While this makes sense in the case of oil, for the case of gas we observe the opposite. This is due to the structure of the EU-Russia gas market, where Russia holds a monopoly over the EU’s residual gas demand and the EU, if it would engage in joint procurement, has market power itself potentially acting as monopsony. However, it has not yet chosen to exercise its market power. Under these conditions, an external price cap for Russian gas can be considered to be the more appropriate policy instrument, because a price cap tends to take away economic incentives for Russia to use its market power, increasing gas prices through decreasing supply. Under such circumstances, we show that an external price cap is superior to a tariff in the sense that for any tariff there exists a price cap that makes both the EU and Russia better off. Consequently, the EU can always design a price cap that gives Russia the same welfare (so it is equally likely to accept), but makes the EU better off compared to imposing a tariff.