A Smouldering pot is an item used in the Ratcatchers quest and it consists of weeds and an empty pot. It is used to help Smokin' Joe, of Keldagrim Rat Pit fame clear a hole of rats.
To make it, use Weeds, raked from an Allotment, on an empty Pot to get a Pot of weeds. Then, set it on fire with a Tinderbox.
Smokin' Joe offers his own pot but due to the green phlegm that Joe has coughed up the player refuses. The first time the player attempts to smoke the rats out he is initially unsuccessful but with some help from his cat he succeeds.
Once players have helped Smokin' Joe they are granted access to the Keldagrim Rat Pits and directed to The Face for the next part of the quest.
It might be a referance to smoking Marijuana. As "weed" is marijuana, they are smoking it. If so, this is considered an inapropriate use of the term.