The EconomistAugust 17th 2019 United States 21H
arbourside cannabisin Oakland is a
modern-day temple to the delights
and possibilities of the botanical marvel
that is the plant Cannabis sativa. Around
the airy shop move a well-heeled clientele.
They browse among offerings ranging
from cannabis-infused chocolate to spar-
kling water and vape pens. California was
the first state to allow sales of medical can-
nabis in 1996, and Harbourside one of the
first shops in America to sell pot legally.
Since January last year, the firm has also
been able to sell pot for purely recreational
purposes. Thanks to its large number of
“medical” users, California’s is the largest
legal cannabis market in the world. But
since the legalisation of adult sales, that
market has been shrinking.
Allowing legal sales is supposed to in-
crease the size of the market as they force
illicit sellers out of business. That is the
way it has happened in other states where
cannabis is legal. But according to bdsAna-
lytics and Arcview Market Research, legal
sales in California were $2.5bn in 2018,
down from $3bn in 2017. Josh Drayton,
spokesman for the California Cannabis In-
dustry Association, says that the state has
gone from being the most loosely regulated
market in the world to one of the most
tightly regulated. Moreover, he says the
regulations go above and beyond those for
other products.
Bringing a messy market under control
is likened by many in the industry to put-
ting the toothpaste back in the tube. Many
firms operating in the medical market find
the new regulations challenging and the
fees to get permits and licences too expen-
sive. On top of regulations come taxes in
great abundance. There is a retail excise tax
of 15%, in addition to a sales tax that starts
at 7.25%—rising according to the levels set
by county and city governments. Taxes on
cultivation are many and inventive, too.
On top of this federal taxes must still be
paid, even though the product remains il-
legal under federal law. The federal govern-
ment declines to allow firms to make de-
ductions for running costs. Cannabis firms
are thus taxed on gross profits. The upshot
of is that legal weed is expensive. Andrew
Berman, boss of Harbourside, says your
correspondent (should she want to) could
get an ounce of cannabis delivered outside
his store for $150. In his shop the same pro-
duct, legally bought, would cost $400.
These factors go a long way to explain-ingCalifornia’sincredibleshrinkinglegal
cannabis market. Another hindrance is
thatmostcitiesacrossthestatehavedecid-
ed,initially,nottoallowrecreationalsales.
Somecities,likeLosAngeles,haveallowed
shopsbuthavebeenslowtoissuelicences.
Otherstatesplanningtolegalisecanna-
bisseemlikelytolearnfromthisexperi-
ence.InJuneIllinoisbecamethe11thstate
tolegaliserecreationaluse—thelawcomes
intoeffectatthestartof2020.Despitethe
problemsinthecountry’slargestlegalcan-
nabismarket,potcontinuestogainaccep-
tancearoundthecountry.LisaHurwitz,of
GrassrootsCannabis,a retailer,sayspur-
chasesare increasingfastest amongthe
boomer-and-oldergenerations.“Theyare
eitherrediscoveringit orusingit fora vari-
etyofailmentsthattheyfaceinolderage,”
shesays.Theplant,shesays,isusefulfor
everything,frompaintopoorsleeptoanxi-
ety.Itseemsthatcannabisismovingfrom
theblackmarkettothegreyone.^7OAKLAND
The legal cannabis market shrank in
California last yearDrug marketsLegal and rarer
A
long stretchof highway running be-
tween Los Angeles and San Francisco
separates the dry hills to the west from the
green plains of the San Joaquin Valley to
the east, where much of America’s fruit,
nuts and vegetables are grown. Every cou-
ple of miles billboards hint at the looming
threat to the valley. “Is growing food a
waste of water?” one billboard asks. Anoth-
er simply says, “No Water, no Jobs”.
In the San Joaquin Valley agriculture ac-
counts for 18% of jobs and agriculture runs
on water. Most of it comes from local rivers
and rainfall, some is imported from the riv-
er deltas upstate, and the rest is pumpedout of groundwater basins. During the
drought of 2012-16 landowners pumped
more and more groundwater to compen-
sate for the lack of rain. Thousands of wells
ran dry. As a result, California passed a law
requiring water users to organise them-
selves into local Groundwater Sustainabil-
ity Agencies (gsas), with the aim of bring-
ing groundwater use to sustainable levels
by the early 2040s. In the driest basins,
gsas must file plans on how to do so by the
end of January 2020.
The Public Policy Institute of California
(ppic), a think-tank, estimates that this
could result in as much as 15% of the val-
ley’s 5.2m acres of irrigated cropland lying
fallow. At first glance, each farmer seems to
be faced with a choice: let land go fallow or
grow crops which use less water. But if
landowners in the San Joaquin Valley
traded both groundwater and surface wa-
ter, they could cut their revenue losses by
half, according to the ppic’s estimates.
“Water is an asset and markets would al-
low you to allocate it in the right way,” says
Edgar Terry, a farmer in Ventura County, 50
miles south of the San Joaquin Valley. If
landowners lease pumping rights to others
for more than they would earn from using
the water to grow additional crops, they
benefit. Buyers may make larger profits
from the additional crops they can grow
than the water costs them. Towns or indus-
trial users may pay landowners for addi-
tional pumping rights. The scarce resource
would flow towards its most efficient use.
Given the potential benefits of a mar-
ket-based approach, non-profits such as
the Environmental Defence Fund, the
Fresh Water Trust and the Nature Conser-
vancy have stepped in to advise the gsas on
how to set up markets around California.
Mr Terry’s well, like others in Ventura, are
equipped with meters, which send data to
an online platform. The local water manag-
er can check that everyone has complied
with their respective cap. Participants who
want to buy additional water can place a
bid online. Those who want to sell do the
same. A system matches bids and offers.
Allocating pumping rights is the hard-
est part. Californian law allows landown-
ers to use the groundwater under their
property. But since a water basin connects
all landowners underground, it suffers
from the tragedy of the commons. When
users cannot agree how to allocate quotas,
courts will have to settle the dispute. Mr
Terry and the market pioneers in Ventura
County are trying to avoid this. “We tried to
produce something that could plausibly be
an adjudication,” says Matthew Fienup, an
economist who helped set up the market in
Ventura. “So if we end up in a courtroom we
can just say, ‘Look, here’s our agreement,
and get a stamp’.” If they can make it work,
Mr Terry and friends may create a model for
the rest of the state. 7LOS ANGELES
Caps on groundwater use could flood
California with a new type of tradeTrading waterA liquid market