Tobacco stakeholders and the European Commission disagree over the practical value of the EU-led track and trace system on tobacco products the initial aim of which was to curb rises in illicit trade.

According to an annual KPMG report, funded by the tobacco industry, illicit tobacco consumption in the EU increased by 3.9% or 1.3 billion cigarettes in 2021, following 2.3% growth in 2020.

As part of the Tobacco Product Directive (TPD), the European Commission adopted in 2017 a track and trace system, which according to the then Health Commissioner Vytenis Andriukaitis, would help combat illicit trade.

“The EU has taken a big step forward in combatting the illicit trade in tobacco products,” the former commissioner said.

However, a reply by current Health Commissioner Stella Kyriakides to a parliamentary question has sent confusing messages about the role of the tracing system.

“The system collects information that relates solely to the legal supply chain of tobacco products including cigarettes and roll-your-own tobacco that are currently the only two categories of tobacco products covered by the system. The system does not provide any information on the illicit trade of these products,” she said.

Peter Van Der Mark, secretary general of the European Smoking Tobacco Association (ESTA) said the Commission’s idea behind track and trace was to identify points of diversion from the legal to illegal supply chain.

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Commenting on Kyriakides’s answer, he said: “The reason the Commission has never carried out any evaluation of the system and never communicated concrete information on its outcome is probably because there is nothing to be proud of, as the Commission realised by now that the assumptions the system was based on were wrong”.

“In the meantime, illicit producers and smugglers across Europe are still unbothered and continuing their very lucrative ‘business’, whilst several small European companies have already closed theirs,” he added.

According to van Der Mark, the system has not worked since its “stated” objective was to curb illicit trade.

“In 2021 alone, close to 100 illegal tobacco factories were dismantled within the EU, so illicit production in the EU itself is on the rise, and there is little indication that illicit trade has reduced since Track & Trace was established. To be noted that customs reports when illicit factories are dismantled often indicate that the production is destined to high-taxing countries such as France,” he said.

‘Indirect’ observation

An EU official defended the track and trace system saying it is a key element of the Commission’s 2013 strategy to fight against the illicit tobacco trade.

“Since its launch in May 2019, the system has captured and stored information concerning over 100 billion unit packets of cigarettes and roll-your-own tobacco products, i.e. the two categories of tobacco products that are currently covered by the system, and the logistic and financial operations concerning almost a million economic operators and over one and a half million facilities,” the EU official told EURACTIV.

The EU official explained that although the system collects information that relates solely to the legal supply chain of tobacco products, it also enables “indirect observation” of the illicit trade by “allowing member states to identify irregularities in the tobacco products’ movements and determine when a product was diverted into the illicit market”.

“For this reason, the system has made a significant contribution to the EU’s fight against the illicit tobacco trade since 2019,” the official added.

EURACTIV has previously reported about the emergence in the illicit tobacco trade of “illicit whites” – cigarettes legally produced in non-EU countries but then smuggled and traded illegally.

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Illicit trade and taxation

The tobacco industry also claims that increased excise taxes on tobacco help illicit trade flourish.

They cite as an example the KPMG finding that countries which sharply increased taxation on tobacco – such as France and Ireland – now see the most illicit tobacco trade.

France has imposed a €6.61 excise tax and Ireland €8.42, while the EU average is €3.34. On the contrary, the report suggests that countries like Poland (€2.03), Italy (€3.09) or Germany (€3.40) have the lowest illicit tobacco trade levels.

On the other hand, the European Commission and the World Health Organisation (WHO) have insisted that making tobacco unaffordable through increased taxation is key to reducing smoking.

The WHO has said illicit trade poses a serious threat to public health because it increases access to tobacco products.

But it denies the tobacco industry argument on taxation and illicit trade, saying it depends on many factors.

“The global trade in illicit tobacco products occurs in low tax as well as high tax jurisdictions, results from a lack of control on cigarette manufacturing and the movement of cigarettes across international borders,” according to the WHO.

It also says illicit trade is more common in low-income than in high-income countries, citing the UK as an example.

“In the period 2000–2014, cigarette prices more than doubled in the United Kingdom, while smoking prevalence and illicit trade decreased and tobacco excise revenues increased,” the WHO says.

In an interview with EURACTIV, medical professor Andrzej Fal defended taxation as the “only fiscal instrument” at states’ possession to fight smoking.

“Of course, we can expect some black market, but isn’t that why we have police and others to fight for this part? We cannot say we don’t raise the excise because it will not work,” Dr Fal said.

“If a country says so, then it should make important changes,” he added.

That is disputed by Peter Van Der Mark.

“We have indeed many reasons to believe ill-thought through taxation indeed fuels illicit trade, notably by increasing demand for cheap products when consumers are facing budgetary constraints,” he said, citing the examples of France and Ireland.

A survey published on 4 April and funded by Philip Morris International (PMI) found that 83% of the French people believe that excessive tobacco tax increases encourage illicit tobacco consumption and trade, as the black market offers access to cheaper illicit tobacco and nicotine-containing products.

He stressed that the German example is more effective “with step and moderate tax increases as to avoid market shocks, whilst still reducing the affordability of tobacco products and smoking prevalence”.

“We believe the German taxation structure allows for this. Germany, unlike France, maintains a differential of taxation between cigarettes and rolling tobacco. Outpriced consumers can therefore remain on the legal market rather than seeking cheaper and most likely illicit alternatives,” he added.