In January of this year, authorities in Iraq arrested an alleged drug kingpin named Kazem Hamad. Hamad is accused of operating a criminal network in Australia netting hundreds of millions of dollars in illicit sales. This organized crime often turned violent, with police recording countless instances of extortion, hundreds of arsons, and several homicides, including one taking the life of an unrelated bystander. None of this is atypical for gang-driven drug trafficking. What makes Hamad’s case unique is that one of the main drugs he trafficked is legal throughout the world, including in Australia. His criminal empire was built on nicotine.
Australia is often praised as a trailblazing pioneer in public health for its exceptionally high taxes on cigarettes, mandated plain packaging with graphic warning labels, and extremely strict regulation of e-cigarettes. In recent years, Australia has also provided a vivid example of how these policies, intended to control the tobacco trade, can lead instead to losing control of it entirely. The arsons and homicides associated with the illicit trade have become impossible to ignore, dubbed the “tobacco wars” in Australian media. A new government report addresses an “illicit tobacco crisis.” Another report from the government’s bureau of statistics concludes that illicit sales have risen from just 12 percent of the national nicotine market in 2017 to 80 percent in 2025.
If Australia was once considered a model for how to get tobacco policy right, it’s now the bellwether for how it can go wrong, a dramatic—but certainly not isolated—example of how governments around the world are shifting nicotine consumption to illicit markets. From regulation and taxation to full prohibition of certain products, policies intended to discourage use are having the unintended consequence of driving massive amounts of illicit trade.
The Path to Illicit Markets
Prohibition has always been an option. As tobacco diffused outward from the Americas in the Columbian exchange, it met with both opposition and intrigue. Authorities attempted mostly in vain to restrict it. Rodrigo de Jerez, a member of Columbus’s expedition who brought smoking home to Spain, was imprisoned by the Spanish Inquisition. Ottoman Sultan Murad IV, among other tyrannical rulers, imposed the death penalty for smoking. As recently as the early twentieth century, temperance advocates in fifteen U.S. states succeeded in prohibiting the sale of cigarettes.
Eventually, however, the lure of tobacco almost universally overcame such opposition. Historian David Courtwright describes the period of global trade beginning in the sixteenth century as part of a “psychoactive revolution” in which ordinary people gained unprecedented access to mood-altering substances. Three of these took particularly strong hold in the West, gaining social acceptance and economic importance: caffeine, alcohol, and nicotine.
Attitudes toward tobacco began to shift in the 1970s, with public policy becoming gradually less laissez-faire, a trend that accelerated substantially in the early 2000s. Authorities
increasingly subjected tobacco to various regulations, such as taxes, age restrictions, rules about where people can smoke, and warning labels. Yet the product itself remained generally legal for adult consumption.
In recent decades the consensus that tobacco and nicotine products should be legally available to adults has begun to break down. Many factors contribute to this shift. Certainly chief among them is the flood of compelling research tying smoking to various diseases and the enormity of the death toll caused by smoking. Even today, more than 400,000 annual deaths in the United States and more than 7 million worldwide are still attributed to smoking. A second is the stigmatization of tobacco use as smoking has become concentrated among those with less education and lower incomes. Third, the development of innovative new nicotine products has generated alarm and demands for restrictions, especially with regard to their use by minors.
Today, the legality of nicotine and tobacco products exists on a spectrum. At one extreme are products sold freely, with minimal or no regulation, or products sold in general compliance with longstanding regulations and taxes. The market for electronic cigarettes in their infancy is an example of the former, when the novel devices fell outside regulations for either tobacco or medicinal goods. (In a handful of countries, this is still the case.) Combustible cigarettes, cigars, chewing tobacco, and other legacy products sold under established tax and regulatory frameworks are also generally sold in licit markets, with some notable exceptions to be discussed below.
At the other extreme are products explicitly banned by laws and regulations. Such bans are most prevalent for innovative nicotine products such as e-cigarettes, heated tobacco, snus (a type of oral tobacco developed in Scandinavia), and nicotine pouches. To cite just a few examples, snus is prohibited throughout most of Europe; e-cigarettes are banned in many countries, including Brazil, India, Mexico, and much of southeast Asia; heated tobacco, which is gaining popularity in other parts of Asia, is banned throughout China and around thirty other countries. Flavored products and disposable e-cigarettes are also common targets of prohibition.
In between these extremes are products that can be sold legally, but where the costs of compliance with taxes or regulations drive sales to illicit markets. Excise taxes on cigarettes are a textbook example. Imposing taxes is a proven method of discouraging smoking, but high tax rates create incentives for avoidance through illicit channels. The United States’s bureaucratic approach to e-cigarettes is a prime example of regulation driving illicit sales. Since the Food and Drug Administration deemed e-cigarettes as tobacco products under its purview in 2016, it’s been illegal for any e-cigarette to be marketed without first receiving authorization from the agency. In practice, the pathway to regulatory approval is so difficult to navigate that the vast majority of e-cigarettes are sold illegally.
Taking a broad view—and at risk of overgeneralization—it can be said that illicit markets in cigarettes are generally driven by taxes, and that illicit markets in vapes and other novel products are driven by regulation and prohibition. Let’s look at each in turn.
Taxes and Illicit Cigarettes
Excise taxes are among the most straightforward ways to discourage smoking. Although demand for nicotine is relatively inelastic—it’s a notoriously addictive substance, after all—taxing tobacco has been consistently shown to reduce demand by lowering individual consumption, encouraging quitting, or preventing people from smoking in the first place.
The catch, of course, is that the gap between the pre- and post-tax price of tobacco creates opportunities to sell illicit cigarettes at a profit—and the larger that gap, the larger the opportunity. Worldwide, estimates place the average share of cigarettes sold illicitly at around 10 percent. The outliers, however, can be far higher.
Australia provides the most dramatic example. Beginning in 2010, the country enacted a series of tobacco tax hikes far above the rate of inflation, making it one of the most expensive countries in the world for cigarettes, with taxes of more than $30 AUD per pack and legal retail prices above $40. The growth of the illicit market followed predictably, with packs sold for less than half the legal price. In 2016, illicit cigarettes made up less than 10 percent of the market for nicotine. They are now more than 64 percent, with much of the remainder coming from other illicit sources of nicotine, such as e-cigarettes.
The United States shows similar, if not quite as dramatic, variation between low- and high-tax jurisdictions. The federal tax is $1.01 per pack. States vary widely in their tax rates, from less than a dollar in many southern states to more than five dollars in New York. Local taxes raise prices even higher. This creates substantial arbitrage opportunities, with cigarettes flowing from low-tax states and Native American reservations into high-tax markets. California and New York rank as the states with the most smuggling, at more than half of their markets by one estimate. A recent study of discarded cigarette packs in high-tax New York City found that only 16.6 percent of them bore the proper tax stamp.
Though taxes are typically the main driver of illicit cigarette sales, it’s also worth mentioning the role of flavor bans. California and Massachusetts have both prohibited the sale of menthol cigarettes, and there is evidence in both cases that this is contributing to smuggling from other states.
Illicit cigarette sales take three general forms: contraband, illicit whites, and counterfeits. Contraband is legally produced but smuggled across borders to evade taxes or regulations. Illicit whites are cheap, often unbranded cigarettes produced en masse in places like eastern Europe and China. Counterfeit cigarettes imitate name brands. Experts estimate that contraband makes up the bulk of the illicit market, with 20–30 percent coming from illicit whites and less than 10 percent from counterfeits.
Novel Nicotine Products, Regulation, and Prohibition
Innovative nicotine products like e-cigarettes, snus, and nicotine pouches offer a much safer risk profile than combustible cigarettes. Despite this, they are often much more stringently regulated, if not prohibited altogether.
The United States provides an instructive example. Under the Tobacco Control Act, new cigarettes can be introduced to market by demonstrating to the FDA that they are “substantially equivalent” to existing cigarettes—which is to say that they are every bit as deadly as the products that kill hundreds of thousands of Americans every year. E-cigarettes face a far higher hurdle, requiring extensive documentation to prove that authorizing them is “appropriate for the protection of public health,” not just for individual users, but for the population as a whole.
To date, only 48 e-cigarettes have ever made it through this process. Even that figure is an overstatement, as it counts individual components of a system—the device and the liquid pod or cartridge—as separate authorizations. Until May of this year, none of these were in flavors other than tobacco or menthol.
Visiting a vape shop or convenience store confirms that these authorized e-cigarettes comprise just a small slice of the market. Unauthorized products abound. Some of these are from brands that have made applications to the FDA and are awaiting a final ruling. Many others forego the legal process entirely: a rapidly shifting mix of disposable, flavored, and often untraceable vapes, typically originating in China. Combined, these illicit sources make up the bulk of the U.S. market for e-cigarettes. An analysis of United States sales data from 2025 concluded that nearly 70 percent of e-cigarette sales are for products not authorized by the FDA.
In addition to these federal regulations, six states and more than 420 localities in the United States have enacted flavor bans, making the sale of flavored vapes a matter of state and local law enforcement, leading to arrests, prosecutions, and in at least one case, imprisonment of sellers.
Taking an international view, the market intelligence firm Euromonitor International classifies 63 countries as having a regulated mix of licit and illicit vapes, 14 (mostly in Africa) as having no regulation, and 33 countries as having full or partial bans on e-cigarettes. Euromonitor’s analysis places Australia in the last category, with regulations so stringent that they amount to de facto prohibition of the products consumers demand. Vape sales are restricted to pharmacies, where the selection is limited, and pharmacists are under no obligation to provide them. As a result, an illicit market for vapes thrives in Australia. Combined with sales of illicit tobacco, the country’s illicit nicotine market is believed to exceed $7 billion AUD annually, exceeding the sales of every illegal drug except methamphetamine.
Even in countries with more permissive regulations, illicit markets can thrive. Israel permits e-cigarettes, but a combination of nicotine concentration limits, high taxes, and plain packaging has displaced almost 100 percent of vape sales by volume to the illicit market; illicit sales comprising more than 80 percent of the market in regulated countries are not uncommon. Globally, Euromonitor estimates that 71 percent of the e-cigarette market is sold illicitly, comparable in volume to the global illicit market for cigarettes.
Emerging Prohibitions
The illicit markets covered so far are caused by prohibitively costly taxes and regulations, as well as actual prohibition of broad classes of nicotine products. Two emerging policy frontiers threaten to drive even more products underground: smokefree generation laws and capping the level of nicotine in cigarettes. These policies present a complete break with the consensus that adults should have legal access to tobacco products.
The concept behind smokefree generation laws is to implement prohibition gradually, forbidding the sale of tobacco to anyone born after a certain date. In effect, this would raise the age at which one could legally purchase tobacco year by year until eventually no one alive is permitted to do so. The Maldives was the first nation to implement such a law, followed recently by the United Kingdom. (A similar law passed in New Zealand but was repealed before taking effect.) Twenty-two towns in Massachusetts have also implemented nicotine-free generation laws. As the name suggests, and in contrast to the UK’s law, which applies to tobacco but not to e-cigarettes and other nicotine products, the Massachusetts laws target nicotine use of all kinds.
The other significant policy is to implement a tight cap on the amount of nicotine in tobacco products, requiring manufacturers to strip all but trace amounts of the substance from nearly all forms of combustible tobacco, including cigarettes, roll-your-own, pipe tobacco, and most cigars. The intent is to render the products non-addictive. Advocates stress that this would not be prohibition, since very low nicotine tobacco would remain legal, but it would certainly prohibit these products as they’ve existed for centuries. The FDA proposed a rule implementing this standard in January 2025, though it appears unlikely to proceed under current leadership.
For the sake of completeness, it’s worth mentioning that a few cities in California, including Manhattan Beach and Beverly Hills, have implemented simple prohibition of tobacco sales without the workarounds of a nicotine cap or a generational ban.
The impact of these prohibitionist policies is largely untested, since it will take time for smokefree generation laws to affect significant shares of the population, and the nicotine cap remains just a proposal for now. But there is real enthusiasm for these ideas in public health, and the implementation of a smokefree generation law in the United Kingdom, a country of 70 million, is significant. Both policies would create obvious new avenues for illicit markets, whether to provide goods to the increasing number of adults restricted by generational bans or to anyone seeking conventional tobacco with nicotine.
The Limits of Tobacco Control
According to Euromonitor’s estimates, around 20 percent of the global market for nicotine (excluding China) is currently illicit, divided about evenly between cigarettes and nicotine vapor. The expansion of restrictive laws and prohibitions, along with growing consumer preference for novel, lower-risk products, provides reasons for expecting this share to grow. Euromonitor projects that fully a quarter of global nicotine sales will be illicit by 2030. To put that in more concrete terms, converting vapor sales to cigarette equivalents, they expect that less than four years from now, one out of every four units of tobacco will be sold illicitly.
This raises questions about the limits of tobacco control. By one vital measure, the effort to reduce smoking has been extraordinarily successful. In the United States, the rate of adult smoking has fallen from more than 40 percent in the 1960s to less than 10 percent today. The future looks even brighter: less than 2 percent of today’s teenagers in the United States smoke cigarettes. Yet the effort to snuff out the remaining share of smoking—and more ambitiously, to end the use of nicotine entirely—faces real constraints.
These difficulties stem from two important trends in tobacco control: hostility to even low-risk forms of nicotine use and overconfidence in what can be accomplished through top-down regulation and prohibition.
The idea of making safer nicotine products has long been controversial, but in previous decades both public health advocates and anti-smoking politicians were more open to the possibility than mainstream tobacco control experts are today. In the 1960s and 1970s, the federal government was actively involved in encouraging research into safer cigarettes. The American Cancer Society and American Heart Association were also receptive.
As researcher Michael Russell explained the case for tobacco harm reduction in a 1991 editorial for The Lancet, “The central paradox is that, while people smoke for nicotine they die mainly from the tar and other unwanted components in the smoke.” If the two could be separated, “There is no compelling objection to the recreational and even addictive use of nicotine provided it is not shown to be physically, psychologically, or socially harmful to the user or to others.”
At the same time that innovation in safer nicotine was beginning to show promise, and concurrent with growing acceptance of more liberal approaches to other drugs, attitudes toward tobacco within public health were becoming more hostile. As historian Virginia Berridge argues in her book Demons, “Concept shift took place with new ideas about ‘use’ and ‘problem use’ applied to illicit drugs, while, conversely, drug-focused ideas of ‘addiction’ began to be applied to tobacco. Tobacco was changing places to become more like a drug [...] From the 1980s onward, new ideas about drug use tended to see it as more ‘normal’ while tobacco smoking became seen as pathological.”
By the late 1990s, attitudes had thoroughly hardened. The head of the American Heart Association responded to an early smokeless cigarette by stating that “talking about a safer cigarette is like playing Russian roulette, sooner or later you’re going to hit the chamber with the bullet in it.” Or as historian of tobacco Robert Proctor dismissed the possibility in his 2012 book Golden Holocaust, “Talk of ‘safer cigarettes’ is rather like talking about safer terrorism, or safer smallpox, or safer forms of drowning: it’s oxymoronic.”
The shift in view toward all nicotine use as pathological came paired with overconfidence in eliminating its use by technocratic means. Proctor’s perspective is again instructive. Dismissing comparisons to the prohibition of alcohol, a drug that he acknowledges many people enjoy recreationally, he dismisses nicotine use as driven purely by addiction. He then makes the leap to it being easy to eradicate via simple prohibition: “It is no longer fashionable to talk about 'magic bullets' in medicine, but here we really do have a magic bullet, requiring (in theory) nothing more than the stroke of a pen."
That “in theory” is bearing a lot of weight. Historic and contemporary experience both suggest that illicit markets will be resilient. Bhutan is the only country to recently attempt tobacco prohibition, which it enacted in 2010. In 2019, more than 20 percent of its population still used tobacco. The ban was repealed during the COVID pandemic in recognition that it incentivized cross-border smuggling, potentially raising risks of viral transmission.
Pandemic conditions aside, there are ample reasons to be wary of the growth of illicit markets for tobacco and nicotine. At a practical level, illicit products undermine efforts at tobacco control. The discouraging effects of excise taxes only work if consumers can’t easily access tobacco at much lower cost. Illicit sales also undermine limitations on flavors, caps on nicotine, and age restrictions. In the event of contamination in the supply, illicit producers are less traceable and accountable, as seen in the cannabis vape poisonings of 2019 and 2020 that sickened thousands and killed more than sixty people, mostly from illicit sources.
Illicit sales are also criminogenic, transforming peaceful and legal exchange into crime. Australia is the most striking example, with its violent gang wars and smugglers adding nicotine to their portfolio of narcotics. In jurisdictions that have banned flavored cigarettes and e-cigarettes, law enforcement resources are spent on investigations, seizures, arrests, and prosecutions of non-violent sellers. Though violating flavor bans is generally a misdemeanor, since this also typically involves not paying excise taxes on illicit products, it can also entail felony tax evasion and the risk of years behind bars.
Efforts to enforce prohibitions are leading predictably to the imposition of harsher penalties. In Australia, possession of commercial quantities of nicotine vaping goods is now punishable by up to seven years imprisonment, and up to fifteen in the state of Western Australia. In Singapore, sellers of nicotine vapes can be sentenced to six years in prison. In Mexico, eight. In Thailand, ten. In some jurisdictions, simple possession of alternative nicotine products can lead to arrest.
Imprisoning sellers of lower-risk nicotine products is neither humane nor good policy. In contrast, more liberal approaches to nicotine and tobacco show clear progress in reducing the harms of smoking. The lifesaving potential of e-cigarettes arose from bottom-up innovation operating mostly outside of government regulation. Sweden has famously achieved low rates of smoking in part due to consumers’ switch to much safer snus. Other Nordic countries have followed suit, and one can see similar trends around the world with e-cigarettes, snus, nicotine pouches, and heated tobacco.
Much of this progress has been made in spite of hostility from governments. The trend today is toward higher taxes, tighter regulations, and eventual prohibition, with predictable consequences for illicit markets. The malfeasance of the tobacco industry in the twentieth century certainly makes the desire to regulate it out of existence understandable. But however much the public dislikes the legal tobacco business, they may discover at their peril that they dislike the illegal tobacco business even more.
