SUST-RUS - effects of gas price liberalization

Russia has the largest gas reserves in the world, but most of gas production is sold below long term marginal cost. Therefore strategic planning of liberalization of gas prices is a hot topic in this country. Several studies on the subject have been carried out, but none of them has investigated all the effects of this liberalization, including its social and environmental implications.

Consequently, the computable general equilibrium (CGE) model of the Russian Federation, which was developed under the SUST-RUS project, was applied to study the economic effects of gas price liberalization. Data from 2006 concerning regional and sectorial specific productions, consumptions, interregional and international bilateral trade and energy flows were used for modelling. A Business-as-Usual (BaU) scenario from 2006 was taken as a reference for displaying the results. The proposal of the Russian government for increasing the prices of natural gas on the domestic market with 10% per year was taken as a reference, and the following scenarios were considered:

  • Consumers face annual gas price increase by 10% from 2012 onwards.
  • Firms face annual gas price increase by 10% from 2012 onwards.
  • Both consumers and firms face annual gas price increase by 10% from 2012 onwards.

The first scenario would have a positive impact on the Gross Domestic Product (GDP), national savings, tax revenues and total investments. In the other scenarios, export and GDP would decrease.

On the other hand, switching from gas to other energy goods would induce big production losses in the gas sector, whereas coal, petroleum and power generating sectors would gain. The losses in the gas sector would be large (around 15% in 2020 if compared to 2006) if only firms had to face the price increase, but if households were taxed the losses would be amended. At a regional level, only the Ural region would be affected by this measure, mainly due to the high presence of energy-intensive industries.

From an environmental point of view, simulations showed that increasing gas prices would keep energy efficiency indicators unchanged until 2015, due to the low effect of household consumption on total gas consumption. Only if governments decide to charge industrial producers with higher gas prices a significant improvement in energy efficiency would be observed (a 1.9-4.9% improvement in 2015 and a 3.0-8.5% improvement in 2020). Linked to energy efficiency, CO2 emissions would be reduced only if producers were concerned, that is, if industrial producers advance in terms of energetic modernisation. In this case, reductions of about 10% are expected in 2015, and 20% reductions in 2020. Finally, from the social point of view liberalisation of prices would harm citizens if the price increase were applied only to them.

Christophe Heyndrickx, Natalia Tourdyeva and Victoria Alexeeva-Talebi “Gas price liberalization: Impact assessment with a multi-sector multi-household model of the Russian Federation”