European Economic Impacts of Cutting Energy Imports from Russia: A Computable General Equilibrium Analysis

The recent economic sanctions against Russia can jeopardize the sustainability of the European Union’s (EU) energy supply. Despite the EU’s strong commitment to stringent abatement targets, fossil fuels still play a significant role in the EU energy policy. And high dependency on Russian energy supplies underlines the vulnerability of the EU energy security. Using a global computable general equilibrium model, we prove that the current EU embargo on coal and oil imported from Russia will have adverse supply effects, substantially increasing energy prices and welfare costs for the EU resident. Although it reduces emissions, extending the embargo to include natural gas doubles this welfare cost. The use of coal is likely to increase, especially in EU electricity generation, given the current constraints of additional import capacities from non-Russian producers. For Russia, a more substantial depreciation of the ruble because of the cut in natural gas exports to the EU could stimulate higher exports outside the EU, potentially easing its welfare loss.