Australia’s tobacco debate is increasingly about more than smoking rates. With illicit cigarettes and vapes capturing a growing share of nicotine consumption, policymakers face a harder question: can taxation and enforcement succeed when the regulated market is dramatically more expensive—and, for lower-risk nicotine products, often less accessible—than the black market?
Canada confronted a comparable problem in the early 1990s. By 1994, contraband cigarettes reportedly represented around 40% of its tobacco market. Canadian manufacturers exported billions of cigarettes to the United States, after which products were smuggled back across the border without Canadian taxes. Exports reached roughly 17 billion cigarettes in 1993, while the profits attracted increasingly sophisticated criminal networks.
Rather than relying on enforcement alone, Canada tackled smuggling’s economics. In February 1994, federal cigarette excise was almost halved, from C$10.36 to C$5.36 per 200 cigarettes, accompanied by provincial reductions in several provinces. Crucially, lower taxes were combined with stronger border controls, an export tax, measures to differentiate exported products, youth protections and other interventions.
The illicit market subsequently contracted dramatically. Canadian cigarette exports dropped to seven billion in 1994 and approximately five billion in 1995, while US government analysis later found Canadian cigarette imports into the United States had fallen 96% between 1993 and 1996.
Australia’s price gap is fueling a different market
Three decades later, Australia insists on ignoring the limits of an enforcement-heavy response while maintaining exceptionally high cigarette prices. The most recent data from the Australian Institute of Health and Welfare presents a rather puzzling scenario. Daily smoking rates dropped significantly to 5.6% in 2025, down from 8.3% in 2022–23 and a hefty 19.5% in 2001. At the same time, however, illicit purchasing has risen: 34% of current smokers have reported using illegal tobacco recently, which is double the 17% noted in 2022–23.
Further estimates from the Australian Bureau of Statistics reveal an even more remarkable trend. The ABS indicates that total nicotine consumption surged by nearly 40% between 2017 and 2025, while the share of illicit tobacco soared from 12% to around 80%. They also pointed out that legal tobacco prices have almost tripled since late 2016, whereas estimated illicit prices have remained relatively steady. That does not mean high tobacco taxes caused the entire problem. But it makes the economics difficult to ignore.
This explains why proposals to rethink excise are entering mainstream discussion. One Nation has proposed cutting tobacco excise by 75% and freezing indexation for three years, potentially reducing a legal pack costing around $46.50 to roughly $21–$22. Others have suggested anything from freezing excise to temporarily removing it.
A 75% reduction may or may not be appropriate. What deserves serious modelling is whether Australia has passed the point at which additional tax increases primarily encourage quitting and reached one where a growing proportion of smokers instead substitute cheaper illicit cigarettes. Canada demonstrated that reducing criminal profit margins while intensifying enforcement can change that calculation.
Australia overlooks an advantage that Canada never had
Australia has an advantage that Canada largely lacked in 1994, one which it is sadly ignoring: effective non-combustible nicotine alternatives capable of replacing cigarettes altogether.
Simply making legal cigarettes cheaper is an incomplete and backwards solution in 2026. Meanwhile, Australia has an advantage that Canada largely lacked in 1994, one which it is sadly ignoring: effective non-combustible nicotine alternatives capable of replacing cigarettes altogether.A modern strategy could and should therefore combine excise reform with tobacco harm reduction. Instead of forcing smokers to choose between expensive legal cigarettes and inexpensive illicit ones, Australia could establish a regulated market in which vaping products—and potentially other smoke-free products such as nicotine pouches—are substantially easier and cheaper for adults who smoke to obtain than combustible tobacco.
The argument for incorporating vaping into this framework is thankfully gaining more ground. A recent Cochrane review revealed strong evidence that nicotine e-cigarettes help people quit smoking more effectively than nicotine replacement therapy. In a study with seven trials and 2,544 participants, nicotine vaping boosted quit rates by about 59% compared to NRT.
Similarly, the Royal College of Physicians has stated that e-cigarettes are a significant tool in reducing deaths and diseases linked to tobacco. They also emphasise the need for strategies to limit usage among children and those who have never smoked.
This distinction is crucial: tobacco harm reduction doesn’t mean we should ignore protections for young people or traditional tobacco control measures. It’s about regulating products based on their relative risks and motivating adults who might otherwise smoke to shift away from combustible options.
Australia’s failing pharmacy model
Australia’s current vaping system highlights this issue clearly. Since October 2024, pharmacies have been the sole legal retail outlet for vaping products. However, the 2025 National Drug Strategy Household Survey indicated that only 2.5% of vapers got their products from physical pharmacies, with an additional 4.8% sourcing them from online pharmacies. About 93% found them elsewhere, with tobacconists alone representing roughly half of that figure.
In effect, restrictions intended to control vaping have left illicit suppliers servicing much of the market. A risk-proportionate alternative could license specialist vape retailers, enforce strict age verification and product standards, and make regulated smoke-free nicotine alternatives competitive with both cigarettes and black-market products. Nicotine pouches could also offer another combustion-free option for appropriate adult smokers, although the evidence supporting them specifically as cessation aids is currently less developed than the evidence for vaping.
The objective would be straightforward: maintain pressure that pushes consumers away from cigarettes while creating a powerful pull towards regulated, lower-risk alternatives. Canada’s experience does not provide a blueprint Australia can simply copy. But it does demonstrate that enforcement works differently when governments also address the financial incentives sustaining illicit trade.
Australia could go further. Rather than merely shifting smokers from illegal cigarettes back to legal cigarettes, policy could use the transition to steer them towards regulated products that eliminate combustion altogether.
The ultimate goal should not be preserving high cigarette taxes for their own sake. It should be reducing smoking-related disease. In today’s nicotine market, achieving that may require making the safer legal choice cheaper, easier and more attractive than both smoking and buying from the black market.
