Here's how government policy fuelled a booming black market in tobacco

 
Guy Bentley
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The illegal tobacco market continues to thrive in a country with one of the strictest tobacco control regimes in Europe, according to a report released by Japan Tobacco International (JTI).

Ireland's illegal tobacco trade has grown to a point where non Irish duty paid cigarettes make up 28 per cent of the market.

JTI's research found that criminal gangs operating in the Republic of Ireland are raking in as much as €3m a week from selling illegal cigarettes. Consequently, the Irish exchequer is taking a substantial hit, with between €250m and €450m of tobacco taxes being lost.

In 2013, Ireland generated €1bn of tobacco duty continuing a year-on-year decline. However, smoking prevalence remained relatively constant from the previous year, suggesting illegal tobacco maybe making up the difference.

Ireland's status as one of the hubs of the illegal tobacco trade has not come about in a vacuum. The Irish government's policy of relentless tobacco control has helped to create the conditions where black markets prosper.

Taxation

Cigarettes in Ireland remain the most expensive in the Eurozone, with a premium pack of 20 costing on average of €9.50. 80 per cent of the retail price of every pack is given to the exchequer. When tobacco sold on the streets costs roughly 50 per cent of the price paid in a shop it is little wonder why many Irish consumers opt for the black market over legitimate retailers.

Regulation

In 2013, Euromonitor International found that Ireland had become one of the strictest jurisdictions in the EU when it came to tobacco control. Bans on advertising, smoking in public places and the removal of branding from the point of sale have lead to increasing difficulties for legitimate retailers compared to their criminal counterparts.

The EU adding to black market woes

The revised EU Tobacco Products Directive has introduced swathes of new tobacco controls that have the potential to drive the illicit market even higher. Menthol and other flavoured cigarettes are set be banned, subject to certain exceptions.

Packaging for rolling tobacco will now be given a minimum size of 30g, while shapes of certain packaging will be banned such as those for "slim cigarettes."

Australia and the plain packaging experiment

Irish minister for health, James Reilly, is attempting to introduce a policy of plain packaging for tobacco products.

There has so far been only one country in the world to introduce such a policy - Australia in 2012. The results from Australia's experiment in plain packaging have been far from impressive. Cigarette sales in 2013 rose 0.3 per cent, while sales of illicit cigarettes rocketed by 154 per cent, according to a KPMG report.

In 2013, illicit tobacco accounted for 13.9 per cent of the market a 2.1 per increase on the previous year. Government figures also showed a jump in the number of seizures of illicit tobacco by 60 per cent between 2011/12 and 2012/13.

Lessons for the UK

Two years ago, the Department of Health (DoH) launched a consultation on plain packaging. The response was one of overwhelming opposition, with 64 per cent of respondents against the policy. But the government did not let matters rest there. Sir Cyril Chantler was charged with conducting a limited review of the policy in November 2013.

The Chantler report used broadly the same evidence that had been used in the previous review, with a focus on the potential effect of plain packaging. The report found that standardised packaging would contribute to a "modest but important reduction in smoking." The report was wholeheartedly endorsed by leading politicians and public health activists.

However, without considering the emerging evidence from the only country where the policy has actually been implemented the UK could be running significant risks.

Tax evaded due to the illegal tobacco already amounts to between £800m and £2.4bn. The unintended consequences of plain packaging could see this figure rise significantly.

In 2011/12, the illicit tobacco market in the UK accounted for between two and 12 per cent of all stick cigarettes and between 30 and 41 per cent of rolling tobacco in 2011/12. Black markets are not the only thing that need to be taken into account when considering standardised packaging.

The Institute of Economic Affairs (IEA) cites expert estimates which say the policy could lead the UK government being liable for as much as £5bn in compensation, due to intellectual property law.

A report on plain packaging conducted by the IEA warned of the dangers of implementing the policy without further investigation:

With no new evidence in the intervening period, even from Australia, the Chantler report used the very same evidence that the government found unpersuasive in 2013 to argue for plain packaging. Most of these studies ask smokers and young people whether they find ‘plain’ packs less attractive than conventional packs. This tells us little about whether anyone starts smoking as a result of seeing a cigarette pack of any particular design.