Tobacco control and optimal taxation in a changing European market landscape

A widely-supported aim of governments is to reduce the consumption of healthharming tobacco products and to increase their cessation. To reach this goal, the European Union is preparing a revision of its tobacco-related taxation. A crucial question in this revision is how to treat new (non-combustible) products like heated tobacco and e-cigarettes. The taxation of non-combustible products is two-fold: It can contribute to overall cessation since the entire market becomes less attractive or it can prevent traditional smokers from substituting for less harmful products. This paper provides evidence on European consumers’ perceptions of combustible and non-combustible products. First, we assess the reason for substituting for less harmful products. Second, we develop a theoretical framework to determine the optimal tax environment on the tobacco market. Lastly, we survey empirical evidence on US consumers’ responses to e-cigarette taxation and their impact on smoking prevalence. In addition, we apply price elasticity estimates from the US to European market data. Nearly all available data and studies indicate a positive cross-price elasticity, which has significant implications for tax policy. Our policy recommendation encourages price differentials between combustible and non-combustible products such as heated tobacco products and e-cigarettes. Additionally, we argue that smoking prevalence is not a sufficient measure for public health, since consumption of non-combustible alternatives is excluded. As an alternative, a measure for general harm level should be used.