THE tobacco industry is threatening to flood Australia with half-price cigarettes and force the government to cough up billions of dollars in compensation if it is forced to remove branding from cigarette packets.

British American Tobacco chief executive David Crow, the man behind the Winfield and Benson & Hedges brands, yesterday said cigarette prices could be slashed in half as tobacco giants try to compete with black-market imports.

About 22 billion cigarettes are sold in total in Australia each year, BAT said.

The Federal Government is to replace all branding on packets with a drab olive-green colour plus only the name of the cigarette and a graphic health warning.

Mr Crow said cigarette companies would be forced to drastically cut prices because no-name "chop-chop" tobacco and cigarettes - which cost as little as 30 per cent of a regular packet - would be more attractive.

"Could cigarettes halve over time? I think in the longer term potentially yes," Mr Crow said.

"When you look at the four Ps (product, price, place and promotion), pricing's the big one and that's the only one we have left. We will end up fighting on price."

He said that the cheap prices "basically means more people will smoke, more kids will smoke".

"It's going to backfire and go bad and lead to more people smoking, which is just mad if you're sitting at a government desk," he added.

Health Minister Nicola Roxon rejected the claims as a sign of desperation.

"Big tobacco are fighting to protect their profits, but we are fighting to save lives," she said yesterday.

"I've always said that big tobacco will fight plain packaging tooth and nail. These baseless claims are just another sign of how desperate they are.

"We are not going to back away from this fight. We have won these fights in the past and we will win again."

Mr Crow claimed his company was comfortable with governments trying to reduce smoking across the board, saying: "No one could argue with that."

But he said BAT would fight to keep its brands alive and demand "billions of dollars" in compensation if the federal government pressed ahead with the proposal.

NSW Cancer Council CEO Dr Andrew Penman said the tobacco giant's plans would be counter-productive as the government would react by increasing the excise. The excise levied by the government, which is at 70 per cent, is not set on the price but the amount of tobacco.

"Whatever they do, the price will not affect the excise or the amount the government gets," Dr Penman said.

"It will affect the profitability of the company and therefore the company's income tax and the GST in some way.

"If the industry was to halve the price of cigarettes it will be an invitation for the Government to increase excise by the same amount."

For more on threats by British American Tobacco to flood the market with cheap tobacco go to The Daily Telegraph.