Quantitative Restrictions for EU Oil Imports

The EU Emission Trade System sets a cap on CO2 emissions. That cap is reduced by 1.74% each year (Article 9 of Directive 2003/87).

There is no equivalent cap on EU oil imports. Let’s imagine for a moment that such a cap would be enacted. It would start out with last year’s record of 3,652,941,000 barrels (imported at a price of over $360 billion).

Let’s also imagine yearly reductions of this cap, set at 10%.

What would be the effect of doing so?

For one, obviously, there would be a cap on oil use in the EU, which would mean an absolute cap for CO2 emissions as far as they result from imported oil. Since the EU imports 88% of its oil, by far the majority of oil use would be capped.

But there is another effect, more interesting and more important. Oil and gasoline prices in the EU would go up.

That’s because these quantitative restrictions would restrict supply. Less supply means higher prices.

Higher prices for oil (and gasoline) mean that the transition from stinking gasoline cars to clean electric vehicles will be faster. It also means that the fossil fuel industry will increase their profits, since they get more money for each unit they sell and get a higher valuation for their oil reserves.

That in turn means that the fossil fuel industry will pay their lobbyists to advocate for such a system of quantitative restrictions, instead of trying to resist the inevitable transition to renewable energy.

This is just one way in which “Phaseout Profit Theory” would easily work in real life.

Note that the rate of reduction was set rather higher than that of the ETS, at 10 percent.

That’s because oil use will go down anyway in the long term. The trick is to make supply going down faster as demand, so as to make sure that prices stay high. A quantitative restriction on oil imports could do exactly that.

Another effect would be to increase energy security. The less oil imports are needed (since they are capped anyway), the easier it becomes to secure those imports on the world market.

Obviously there would be a problem with Article 11 of the GATT Treaty, which frowns on quantitative restrictions. The EU would need to rely on Article 20 of the Treaty for an exception to this rule. I will leave it for later to discuss this kind of question in detail. Here I am mainly interested in just putting the idea out and look at what result would be expected from such a move.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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