Is roll-your-own tobacco substitute for manufactured cigarettes: evidence from Ireland?

When tax policies increase tobacco prices some smokers may switch to smoking cheaper roll-your-own (RYO) tobacco. To reduce the harm from smoking, this substitution effect should be avoided. This study analyses whether RYO tobacco is a substitute for manufactured cigarettes (MCs) in Ireland, a country with relatively high price for both products.

Data on duty-paid consumption of RYO tobacco from 1978 to 2011 are used to estimate the demand by applying seemingly unrelated regression and error correction models. Covariates include prices of tobacco in Ireland and in the UK, income and a variable describing tobacco-related health policies.

We failed to find evidence of RYO tobacco being a substitute for MC due to price differences. However, an increase in incomes (1%) is associated with a reduction in the consumption of RYO tobacco (-0.4%), which can be due to substitution towards MCs in addition to quitting or cutting back. Also, an increase in the price of RYO tobacco (1%) is associated with a reduction in its consumption (-1%).

Increasing prices via taxation is an effective way of reducing the consumption of RYO tobacco but due to associations between RYO tobacco smoking and lower incomes, these policies should be accompanied by measures aimed at helping smokers to quit.