Regulation: weeding out the problems

By Pete North - June 17, 2021

While we’re on the subject of regulation, I couldn’t help but be hugely entertained by the news that California is looking to subsidise its legal marijuana industry to the tune of $100m as it continues to struggle to compete with the large illicit pot market – five years after voters approved sales for recreational use.

Legalisation was supposed to destroy the illicit market but many cannabis growers, retailers and manufacturers have struggled to make the transition from a provisional, temporary license to a permanent one renewed on an annual basis – a process that requires a costly, complicated and time-consuming review of the negative environmental effects involved in a business and a plan for reducing those harms. As a result, about 82% of the state’s cannabis licensees still held provisional licenses as of April, according to the governor’s office.

The funds, including $22 million earmarked for LA, will help cities hire experts and staff to assist businesses in completing the environmental studies and transitioning the licenses to “help legitimate businesses succeed”. Essentially subsidising their own bureaucracy.

If ever you wanted a classic example to prove libertarians rights this would be it. Government manages to to take a thriving industry, heap on a shit-tonne of regulation so it can’t compete then has to bail it out and still not solve the problem. The only people now doing well out of it are the inspectors and administrators with a secure government wage while the actual producers are left drowning in paperwork and having to make a profit outside the law by running illegal side-lines.

That is not to say, though, that government should simply pull out and leave them to it. The water and energy demands of the industry are substantial. With California facing severe drought, agricultural use of water comes under the spotlight across the entire state. Moreover, little is known about how industrial-scale marijuana cultivation – complete with its fertilizers, pesticides and security fences – may affect water quality, wildlife, soil health and sewage treatment plant operations. In order to get data you have to invest in bureaucracy.

There you then have to measure the impact of regulation. Outlawing certain fertilisers may improve runoff water quality but at the expense of crop yields and profitability. Energy demand is an important issue for water management, because hydroelectric dams are the region’s top producer of electricity by far.

Thus, as we observed yesterday, re-regulating is not simply a matter of piling in with a red pen and crossing off forms. You need a multidisciplinary regime taking into account the geology and topography of the area, resulting in a regime that cannot be transposed and used elsewhere. It could also take anywhere up to twenty years, taking into account local climate cycles to get sufficient data to regulate. An emergent industry does not have that data to hand thereby regulation is going to be a work in progress and highly experimental. Complicating matters further, growers are developing new species all the time to use less water and be more resilient, requiring less fertiliser and pesticides, rendering much of the regulation obsolete. It needs constant scientific review.

Then with a contentious product, you end up with political demands for harm reduction taxes further down stream in the places where it is sold, meaning that legitimate product is often less potent and more expensive which only stimulates demand for illicit product. Only if you’re able to effectively stamp out illegal growers can you safeguard sales, which increases the risk and thereby the money involved, putting you right back where you started waging a futile war on drugs. Legitimate growers are then looking at their margins wondering if the land could not be put to better use on a less labour intensive, more profitable food crop – making farmers out of druglords.

How the hell anyone squares this circle I don’t know. It beats the wits of America’s best economists so this humble blogger would not dare to venture an opinion. Though one would point out that with the monies they are spending on subsidy, they could do no worse than invest in nuclear desalination for power and water – which again mutates the regulatory landscape.

If all of this is true then much the same is true of wider agriculture and livestock rearing and does not lend itself to the adolescent libertarian fantasies of the ultra Brexiteers. Before you can even begin to address the question of regulation you first need to identify what you want it to do, then establish how you’re going to do it while meeting your trade and environmental treaty obligations.

Not forgetting, of course that the TCA binds the UK to global standards as underpinned by the WTO agreement on Technical Barriers to Trade. There is no clean sweep to be had and divergence carries its own costs and penalties. Not forgetting, of course, the investment required to comply with a new regime. Compliance costs are already high. The one overhead industry doesn’t like is that of regulatory change. The demand for deregulation is from Tory hobby horse politicians, not wider industry.

But then, when it comes to red tape elimination quests, we must recall that we have been here many times before as every new Tory government finds its feet, with a new influx of wide-eyed Toryboys looking to make their mark on the world, with a head full of free market philosphy. Despite the fact that an intelligent review is necessary, you end up with half-baked reports by people who don’t have the first idea of what they are talking about, who go to the IEA for their ideas. We then see these red tape initiatives kicked into the long grass and quietly dropped when it turns out to be a lot harder than any of them imagined. Thus, if there was a Brexit dividend to be had from divergence and deregulation, it will not be the Brexiteers who deliver it.