In the debate about Germany's position on energy imports from Russia, two extreme positions are represented.

While one side is demanding a total embargo on Russian oil and gas, the other wants to stick with business as usual.

The federal government regards an embargo as too expensive for German consumers, and the energy-intensive industry also rejects this.

From an economic perspective, a boycott maximizes the economic costs for both Russian producers and German consumers and companies.

By contrast, free trade in oil and gas, as the government plans to continue, minimizes costs for German consumers and businesses while maximizing profits for Russian corporations, thereby helping fund Putin's war with Ukraine.

But there is an interim solution between free trade and a complete embargo, which would even make Germany and the EU better off than free trade and at the same time would damage Russia enormously by reducing the profits of Russian producers and at the same time generating a transfer from Russia to the EU.

With the suspension of most-favoured-nation treatment for goods and services from the Russian Federation on the EU markets, the EU and other members of the World Trade Organization (WTO) have already created the necessary framework conditions for this, which allow Russia to be treated worse than other WTO members.

Demand and supply influence tax burden

Simultaneously benefiting the EU and harming Russia can easily be accomplished by imposing a duty (import tax) on gas and oil imports.

The cost of each tax is generally split between consumers and producers.

The incidence of the tax (it measures how much the tax increases consumer prices and reduces producer prices) depends on how much consumers reduce demand when prices rise (demand elasticity), relative to how much producers adjust output upwards (supply elasticity). ).

The side that is more sensitive to price changes bears the lesser burden of the tax.

So if European consumers reduce their demand for oil and gas relatively sharply when faced with higher consumer prices,

In this specific case, the Russian supply, especially of gas, is completely inelastic.

It reacts little to changes in market prices as the gas fields that supply Europe cannot supply to other customers.

They are not connected to China, nor does Russia have the ability to liquefy the gas using LNG terminals.

The production capacity is therefore fixed.

If EU demand falls because of the tariff, Russian companies adjust producer prices downwards in order to be able to sell their production.

This reduces their profit.

In theory, they're willing to do that as long as the selling price is above the so-called extraction cost.

China imports duty free

The oil market is much more competitive and Russian producers are more or less taking the world price for granted.

A unilateral EU tariff on oil imports would lead to Russia increasingly looking for other markets.

However, Russian oil would not find other buyers so easily, provided that most countries introduced a tariff on Russian gas.