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What if? The economic effects for Germany of a stop of energy imports from Russia

Author

Listed:
  • Rüdiger Bachmann

    (UND - University of Notre Dame [Indiana])

  • David Baqaee

    (UCLA - University of California [Los Angeles] - UC - University of California)

  • Christian Bayer

    (Universität Bonn = University of Bonn)

  • Moritz Kuhn

    (Universität Bonn = University of Bonn, ECONtribute - ECONtribute: Markets & public policy)

  • Andreas Löschel

    (RUB - Ruhr University Bochum = Ruhr-Universität Bochum)

  • Benjamin Moll

    (LSE - London School of Economics and Political Science)

  • Andreas Peichl

    (LMU - Ludwig-Maximilians University [Munich])

  • Karen Pittel

    (LMU - Ludwig-Maximilians University [Munich])

  • Moritz Schularick

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Universität Bonn = University of Bonn, ECONtribute - ECONtribute: Markets & public policy)

Abstract
This article discusses the economic effects of a potential cut-off of the German economy from Russian energy imports. We show that the effects are likely to be substantial but manageable. In the short run, a stop of Russian energy imports would lead to a GDP decline in range between 0.5% and 3% (cf. the GDP decline in 2020 during the pandemic was 4.5%). (i) In the case of an import stop, imports of oil and coal from Russia can be substituted from other countries, but the situation in the gas market is more challenging. An increase in gas imports from other countries, substitution of gas used for electricity production by coal or nuclear as well as refilling of storage facilities over the summer can only reduce the shortfall to about 30% of gas consumption or 8% of German energy consumption over the next 12 months. (ii) How would the German economy cope with such a shortfall of gas deliveries? The economic effects crucially depend on substitution and reallocation of energy inputs across sectors. To quantify these effects, we use a state-of the-art multi-sectoral open economy model following Baqaae and Farhi (2021) that accounts for elasticities of substitution and reallocation between different intermediate inputs. In a second step, we turn to a simplified model that helps us derive plausible bounds for the economic effects using observed elasticities for energy inputs. In the Baqaae-Farhi model, the output costs of a Russian import stop remain firmly below 1% of Gross Domestic Product (GDP), or between 80 and 120 Euros per German citizen per year. In a more pessimistic scenario where it proves very difficult to substitute Russian gas in the short-run outside the electricity sector, the economic costs would rise to about 2-2.5% of GDP, or about 1000 Euros per German citizen over 1 year. This comes potentially on top of a large increase in energy prices for household and industry even without a shortfall of gas deliveries. Of course the effects are more detrimental in energy intensive sectors. (iii) Data from the Income and Consumption Survey (EVS) show variation in the expenditure share on energy across the income distribution. However, the distributional consequences of an increase in energy prices appear manageable. A targeted policy towards low-income households without reducing the incentives for households to save energy would be a cost effective way of ensuring a fair burden-sharing across households. It is important to maintain strong incentives for households to reduce gas usage. (iv) Economic policy should aim at strategically increasing incentives to substitute and save fossil energies as soon as possible. In case that an active embargo is politically desired, it should start as soon as possible so that economic agents can use the summer period for adjustment. To reduce dependence on imported energy, it is advisable for the government to commit to elevated fossil energy prices, in particular for natural gas, for an extended period to create incentives for households and industry to adjust quickly.

Suggested Citation

  • Rüdiger Bachmann & David Baqaee & Christian Bayer & Moritz Kuhn & Andreas Löschel & Benjamin Moll & Andreas Peichl & Karen Pittel & Moritz Schularick, 2022. "What if? The economic effects for Germany of a stop of energy imports from Russia," SciencePo Working papers Main hal-03881469, HAL.
    • Handle: RePEc:hal:spmain:hal-03881469
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03881469
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    References listed on IDEAS

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    1. Neidell, Matthew & Uchida, Shinsuke & Veronesi, Marcella, 2019. "Be Cautious with the Precautionary Principle: Evidence from Fukushima Daiichi Nuclear Accident," IZA Discussion Papers 12687, Institute of Labor Economics (IZA).
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    5. Maximilian Auffhammer & Edward Rubin, 2018. "Natural Gas Price Elasticities and Optimal Cost Recovery Under Consumer Heterogeneity: Evidence from 300 million natural gas bills," NBER Working Papers 24295, National Bureau of Economic Research, Inc.
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