Federal Ban On Interstate Marijuana Commerce Helps The Illicit Market While Hurting Legal Businesses, California Report Finds

California officials have unveiled a new report on the current status and future of the state’s marijuana market—with independent analysts hired by regulators concluding that the federal prohibition on cannabis that prevents interstate commerce is meaningfully bolstering the illicit market.

The California Cannabis Market Outlook 2024 report—commissioned by the state Department of Cannabis Control (DCC) and carried out by ERA Economics—looked at consumer trends, industry data, regulatory enforcement actions and more.

Marketing conditions for licensed businesses “have been challenging since 2021,” the report says, noting declining wholesale cannabis prices and stagnation in transitioning adults to the regulated market. Just about 40 percent of consumers are buying from legal operators years into the implementation of legalization.

“Competition from the illicit market contributes to lower prices in the licensed market,” it says. “Some consumers still purchase cannabis from illicit operations and illicit cannabis production moves across state lines into different markets.”

“[C]annabis consumption has modestly increased and many of those consumers are purchasing cannabis from licensed cannabis businesses, but there is still a substantial illicit market in California,” it says. “Careful analysis of the data does not show an explosion of illicit market production.”

A key part of the problem is ongoing federal prohibition, according to the analysis.

“Federal legalization of cannabis and facilitation of trade between different states with licensed markets would reduce trade of illicit cannabis and could lead to more stable prices in California and other states,” it says.

The report says “wholesale prices showed that prices in the licensed markets in California, Colorado, Oregon, and Washington are related,” and this “link between the licensed cannabis markets in California, Colorado, Oregon, and Washington has increased over time.”

“The link is the unlicensed market,” it says.

“Prices in these states have converged, and statistical analysis confirms these markets are co-integrated. Market co-integration generally occurs as a result of trade between nations (or in this case, states). However, without any legal interstate trade, this result indicates that the illicit market is a driving factor that connects prices across states.”

That’s not to say that the lack of interstate commerce is the sole factor stymieing the industry, of course. The report also identifies the unregulated market for intoxicating hemp products—as well as local bans on marijuana businesses—as contributing factors.

But as the legal state markets continue to expand and mature, the report says federal laws preventing interstate commerce are significantly impacting the marketplace.

“In the long run, prices are expected to converge in California and other states with adult-use markets as the licensed and unlicensed markets approach a competitive equilibrium,” the analysis says. “However, as long as interstate trade remains federally illegal, licensed market participants are at a competitive disadvantage relative to illicit market participants who distribute across state borders.”

Gov. Gavin Newsom (D) did sign a bill in 2022 that would have empowered him to enter into interstate cannabis commerce agreements with other legal states, but that power was incumbent upon federal guidance or an assessment from the state attorney general that sanctioned such activity.

Following a review of the policy proposal, however, California Attorney General Rob Bonta’s (D) office ultimately determined in 2023 that the state could put itself and its employees at “significant legal risk” of federal enforcement action if it were to authorize interstate marijuana commerce.

There was a congressional bill filed last session by a GOP member, Rep. Dave Joyce (R-OH), that would have ended federal marijuana prohibition in legal states and legalized interstate cannabis commerce, but it did not advance.

In any case, the nwq California report doesn’t suggest that lifting the ban on interstate imports and exports would solve the market’s problems altogether.

For example, it also advises that “low barriers to entry are necessary to encourage this innovation and market competition,” and local restrictions or bans on the industry “stifle growth and innovation, providing a competitive advantage to illicit businesses.”

“The share of consumption that is coming from the licensed market has remained about the same since 2021 (after increasing between 2018 and 2020 following legalization),” it says. “Local (e.g., county and city) regulations that limit consumer access to licensed retailers, other regulatory burdens placed on licensed producers, and federal restrictions on interstate trade are factors that support the illicit market.”

One of those “regulatory burdens” concerns the unregulated hemp market—and specifically the sale of intoxicating products such as delta-8 THC that regulators say undermine the legal marijuana industry.

To that end, Newsom announced emergency regulations late last year outlawing hemp products with any “detectable amount of total THC.” Hemp products that don’t have THC are further limited to five servings per package, and sales would be restricted to adults 21 and older.

“Restricting or banning intoxicating cannabinoids derived from hemp would provide direct benefits to licensed cannabis cultivators and retailers by reducing the supply of substitute products,” the new report says. “Consumers of hemp derived products would be pushed to the cannabis market (both licensed and illicit). This will increase demand for licensed cannabis and put some upward pressure on prices in 2025 and beyond.”

Meanwhile in California, officials are now accepting public comment through mid-March on a plan that would remove medical marijuana as an accepted treatment for injured employees in workers’ compensation cases. The change would effectively prevent doctors in such cases from recommending marijuana and end any compensation to pay for cannabis medications.

Also, a new California law allowing marijuana cafes officially took effect at the beginning of January, authorizing local governments throughout the state to allow cannabis cafes to open.

Last September the governor also signed a series of modest reform proposals, including a bill to make it so medical marijuana donated to low-income patients is tax-exempt and another measure to prevent what advocates call the “double taxation” of marijuana by restricting the ability of local governments to calculate their cannabis levies after state taxes are already applied.

While the governor supports cannabis legalization, he’s been notably reserved about various drug policy proposals in recent years, for example vetoing legislation to legalize psychedelics and allow safe consumption sites for illegal drugs, in addition to nixing legislation to allow small marijuana growers to sell their products directly to consumers at state-organized farmers markets.

Meanwhile, a recent report released by a panel of experts convened by California’s Department of Public Health (CDPH) made a number of major policy recommendations that would radically alter the landscape of the state’s marijuana market, for example by limiting the THC potency of cannabis flower and concentrates, requiring products be sold in plain packaging and setting up a government-run cannabis monopoly along the lines of how stores work in Quebec, Canada.

Separately, in October, an industry effort to halt California’s enforcement of new emergency regulations banning consumable hemp products fell short, with a state judge denying a request for a temporary restraining order.

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