A Long-Overdue Reckoning on Tobacco Policy
https://www.theguardian.com/business/2026/feb/16/treasury-considering-changes-to-australias-contentious-tobacco-excise-as-calls-grow-for-a-freeze
Australia may finally be confronting the limits of its tobacco strategy, but only if we’re willing to see the problem clearly.
For years, the government has relied on a single lever: price. Since 2020, the tobacco excise has climbed 60%, now making up roughly three-quarters of the cost of a legal pack of cigarettes. A 20-pack legally costs $40 or more. On the street, the same pack sells for $10–$15.
That is not just a gap. It’s a signal. And the signal is: if you want nicotine, pay attention to the cheapest route.
Excise revenue once peaked at $16.3 billion. Now, after five years of rising rates, it is expected to generate just $5.5 billion this year. Meanwhile, illicit cigarettes are estimated to account for half of all tobacco consumed. Billions are disappearing from the budget, and the black market is booming.
At first, the logic seemed straightforward: make cigarettes expensive, and people will quit. And it worked until it didn’t.
What Treasury is quietly modelling now is price elasticity, the way people actually respond to price. Economics says that when prices rise, demand falls. But it also says there’s a tipping point. Push prices too high without offering viable alternatives, and consumers do not vanish. They substitute. They find whatever nicotine they can afford and access.
That substitution is happening in real time. High taxes plus restricted access to safer alternatives have left smokers with a stark choice: illegal cigarettes, illegal vapes, or both. Few are quitting entirely. Many are just switching markets.
Here’s the problem: taxation is only one part of the equation. Non-combustible nicotine products, such as vapes, oral nicotine pouches, and other lower-risk alternatives, are just as critical. In countries that have made real progress in reducing smoking, price signals are paired with safe, accessible alternatives. In the UK, public health authorities openly say vaping is far less harmful than smoking. Sweden has used oral nicotine products to drive smoking rates down dramatically. France has recognised similar benefits.
Australia chose a different path. While excise rose relentlessly, access to vaping was restricted through pharmacy-only rules, import controls, and complex regulations. Many adult smokers cannot legally access the products that could actually help them quit. The result: the most dangerous nicotine product remains widely available both legally and illegally, while safer alternatives remain difficult or impossible to obtain.
The outcome is predictable. Two black markets have flourished: illicit cigarettes and illicit vapes. Treasury’s elasticity modelling shows the numbers, but lived experience shows the impact. Smokers navigate a maze: legal packs that cost a fortune, illegal packs that undercut them, and safer options that are out of reach. The policy logic does not match reality.
A freeze on excise might slow growth in the illegal trade and stabilise revenue. It could reduce pressure on enforcement agencies. But it cannot, on its own, reduce smoking-related harm. For that, we need a three-part approach:
Make combustible cigarettes expensive enough to discourage use, but not so extreme that the market collapses into illegality.
Make safer nicotine products accessible, affordable, and clearly regulated.
Maintain enforcement against the illegal supply that will always try to fill gaps.
Without all three, the system will remain lopsided. Prices punish legal smokers but cannot reach illegal sellers. Safer alternatives sit behind regulatory walls. Consumers are left with friction, confusion, and risk.
Excise alone will never be enough. Behaviour adapts faster than policy. If the goal is fewer smoking-related illnesses, the solution must be broader than taxation: it must recognise substitution and risk. Non-combustible nicotine products are not a side issue. They are essential to giving adult smokers a viable path out of combustion.
Australia now faces a choice: continue relying on a single, increasingly ineffective lever, or modernise the framework to include taxation, harm reduction, and enforcement working together.
Behaviour adapts. Markets respond. The question is whether policy will adapt to or whether we will keep paying the price, in health, crime, and lost revenue.
There is strong evidence that increasing the price of cigarettes (by increasing excise) does decrease smoking. But Australia’s experience shows that raising the price of cigarettes to stratospheric levels is extremely counterproductive. Sure, some smokers quit who might not have otherwise. Some smokers shift from premium to discount brands. And very many shift to much cheaper illicit cigarettes or to nicotine vapes (which in Australia are >90% supplied by the black market because of ridiculously restrictive regulations). There have been some very nasty downsides from sky high cigarette excise: low income and other disadvantaged smokers have been further impoverished by this regressive tax; governments have lost billions of dollars of tax revenue every year; the black markets in cigarettes, tobacco and vapes has boomed and become violent with several homicides; and we have had rampant extortion of retailers. Surely cigarette prices will have to be reduced to a level that smokers can afford and are willing to pay. As the US Declaration of Independence said in 1776, ‘governments are instituted among men, deriving their just powers from the consent of the governed’. Australia has demonstrated how governments lose control when they try to go well beyond what the governed consent to. But Australia should also make it easier for smokers to quit, as New Zealand did, by switching to safer, smoke-free nicotine products including vapes. Australia got into this mess when Ministers accepted the advice of zealots over a decade and a half ago. What role will law enforcement play in reducing Australia’s illicit markets in cigarettes, tobacco and vapes? Judging by the Australian and international experience with illicit drugs, minimal or less. Australia spends billions of dollars every year on customs, police, courts and prisons attempting to make illicit drugs unavailable. But annual surveys of Australians who use drugs show that 70-90% report that drugs like heroin are ‘easy’ or ‘very easy’ to obtain. So forget about supply control being a panacea. It’s an expensive way to make a bad problem worse.
Australia will eventually be forced to reduce cigarette excise to levels smokers are prepared & able to pay. NZ type vape policy makes it easier for smokers to quit