Why are so many illicit businesses still blunting LA’s Cannabis industry?
Navigating the Green Maze: Challenges and Solutions in California's Cannabis Industry.
A fire in March at an unpermitted cannabis operation in Downtown Los Angeles prompted lots of press about the dangers of cannabis extraction facilities in general (they “often use industrial solvents and machinery that can be hazardous,” wrote SFGate), and renewed conversations about the persistence of illegal cannabis operations around LA in particular.
“About 70% of the market is illicit,” said Kyle Conley, CEO of Long Beach-based Glass House Brands, in a recent AirTalk podcast panel discussion on the state of the California cannabis industry.
“The entire South Bay of LA County is illicit,” added Conley, himself a South Bay resident. “I mean, there are no legal retail shops there.”
The news about the fire, echoing one about another major blaze in a marijuana grow operation south of DTLA in April 2021, also prompted its share of snickering Cheech and Chong-style jokes on social media.
“In other news, local grocery stores sell out of Doritos,” cracked a commenter on Facebook.
But Christina Dempsey, founder of the Cannabis Policy Lab in Sacramento, said such news stories (and the usual wisecracking public reaction to them) only detract from the real issues facing the cannabis industry, which she lists as a “patchwork of laws” and obstacles for businesses trying to enter the legal market.
“There are things like fires or outright crimes in cannabis operations that always get a lot of press,” she said. “But you can’t really expect the illicit market to diminish drastically if you’re still not providing access to the regulated market in such large portions of this state. Certainly, one way the state and local governments could do more is to really foster a regulated market so that the illicit market is not in as high demand as it now is.”
Dempsey worked as a cannabis regulator with the California Department of Public Health for nearly four years and as the inaugural policy and research director for the California Department of Cannabis Control before founding the Cannabis Policy Lab in August 2023, a nonpartisan organization that supports local and state governments and academic institutions through research and consulting services.
In February, the CPL published a 30-page white paper outlining recommendations on how to improve California’s cannabis laws and regulating framework. In her interview this month with LA Downtown News, Dempsey broke her findings down to seven main challenges facing California’s legal cannabis industry that perpetuate the illicit market:
Regulatory framework
While every state that’s legalized some form of marijuana use in recent years has faced its own challenges regulating the market, cities in California have faced particular difficulties transitioning from a long-standing, informal medical cannabis market to a strictly regulated adult-use market.
“California is really unique in that we had an existing market for more than 20 years that we legalized,” she said, referring to the Compassionate Use Act approved by voters in 1996’s Proposition 215, which exempted certain patients and their caregivers from criminal liability under state law for the possession and cultivation of marijuana for medicinal use.
“But it didn’t set up any state regulatory framework, so what we had from 1996 until 2018, when recreational adult use was legalized, was this well-developed, intricate network of medical cannabis providers and patient relationships, but which were largely unregulated by the state. And then in 2018, we asked everyone to shove their operations into this really strict regulatory framework. So that has made it very challenging for businesses that had operated under those previous laws to come into the legal market.”
Local government bans
“There were also a lot of local governments in California that adopted bans on cannabis businesses right ahead of the implementation of adult use,” Dempsey added.
“You can’t really expect the illicit market to diminish drastically if you’re still not providing access to the regulated market in such large portions of this state,” says former state cannabis regulator Christina Dempsey. (Cannabis Policy Lab/Submitted)
According to the California Department of Cannabis Control, 65 cities in Los Angeles County as well all unincorporated parts of the county still prohibit all cannabis business types.
“If you are a consumer living in those areas, it can be really challenging to access regulated, legal safe-tested cannabis,” Dempsey said. “And it can also be challenging for businesses that are just trying to figure out how to navigate the system.”
Access to state resources
The state-funded Cannabis Local Jurisdiction Retail Access Grant authorized in 2022 was meant to address the prohibited areas — or “cannabis deserts,” as Dempsey, who worked on the grant, calls them.
It invited local governments to claim a share of $20 million in resources to develop and implement cannabis retail licensing programs in their cities. But in its first $10 million phase, Dempsey said, “there were so few local governments that even applied for funding that less than half of that was able to be awarded.”
She wanted to know why. “For some of the smaller jurisdictions who only have a handful of staff, they can’t fathom having a program that requires multiple staff members, and they look at the sprawling nature of these programs and feel like it’s much more than they can take on.”
To solve that, she recommends crafting distinct roles for both the state and local governments that “would allow both entities to put their resources toward that specific role, rather than trying to tackle everything and duplicating what the other is doing.”
Interstate commerce
California has the ideal climate — and decades’ worth of experience — for cultivating cannabis. But because of the interstate commerce laws governing the industry, growers are unable to sell their products outside the state.
This creates a system, as Kyle Conley noted in that podcast roundtable, where growers in cold East Coast states like Massachusetts are using 10% of the state’s electrical grid to grow cannabis inside warehouses, while California is left with an oversupply of product, coupled with a lack of retail options.
“I think California produces 90% of strawberries for the country,” said Conley. “Imagine if (those producers) could only sell their strawberries in California. I think that’s basically what’s going on.”
“The conversation around interstate commerce is changing,” Dempsey added. “But there are many questions and standardizations needed to facilitate it effectively.”
Hemp market regulation
The frustration among state cannabis regulators with the unregulated proliferation of intoxicating hemp products is undermining the efforts to create a regulated and health-conscious cannabis market, according to Dempsey.
“The 2018 Farm Bill de-scheduled hemp and removed it from the Controlled Substances Act, which has unfortunately led to this proliferation of intoxicating hemp products throughout the country,” she said, noting that some of those products have been found dangerous.
“And at the same time, I hear from cannabis companies that are challenged with these incredibly high federal, state and local tax rates that make it really hard to have a profitable business. And yet hemp companies are exploiting what many have said is a loophole in the law — and doing so quite profitably. I think that’s another issue that is going to have to come to a head soon.”
Integration of Tribes
“One thing that is not talked about very often but should be is tribal participation in cannabis markets,” Dempsey said.
“For a tribe to operate a cannabis company on their own land, if they want to participate in the rest of the state market, they have to sign a waiver of sovereign immunity, which is a very rightfully sensitive subject for tribes. It’s basically saying that this hard-fought right must be signed away just in order to participate in the market, and that you have to allow state regulators full access to your land.
“California could be looking at tribes and saying, ‘You absolutely can participate, we won’t come onto your land, but if product leaves your land and comes into the rest of the state market, there are some standards that you’ll have to follow so that we can maintain consistency across the state market.’”
She says such standards will eventually have to be established anyway to open the industry up for interstate commerce. “So why not start with tribes? I think we owe it to them, to give them a reasonable opportunity for participation.”
Training for government officials
Lastly, Dempsey mentioned the necessity for continuous training and education among government officials and regulators about the cannabis industry, which she says is critical to maintaining and improving the regulatory framework.
“It’s an interesting policy area, because I don’t know any other where you have to learn about agricultural policy and environmental policy and, you know, different aspects of economics and commerce,” she said.
“It’s a fascinating area. And I think if we can excite the next generation of government staff to get into this field, that would be a wonderful thing.”
