Uzodinma Ukagwu | Sports Editor
Featured Image: Analyzing all the pieces of the new industry, including size, scope, international trade, taxes, black market, environmental costs and social. | Courtesy of Pexels
Recreational cannabis is finally legal, and many Canadians are excited. A new industry has opened up. Companies have prepared new products for the market, and provincial governments are already looking forward to a new stream of revenue for their coffers.
However, what is the size of this new industry, and how many jobs and businesses is it likely to create? How much tax revenue will governments collect and how will this affect the black market? What also, are the social and environmental costs of cannabis legalization?
Estimates of the amount of economic activity that the legalization of cannabis will add range from $4 billion to $8 billion Canadian (CAD). Toronto Dominion (TD) changed their gross domestic product (GDP) growth forecast for the last quarter of the year from 2 to 2.9 per cent. These figures are, however, largely inflated, as the Canadian method of measuring GDP had previously excluded the underground cannabis economy. GDP growth forecasts will level-out after Statistics Canada revises GDP numbers back to 1961, to incorporate the cannabis numbers.
Canada is now viewed as the global leader in the cannabis market. The inability of all aspects of the US business sector, including banks and investors, to participate in the cannabis market has made Canada the go-to destination for the world-wide cannabis industry. The biggest cannabis companies, the largest grow operations, and the best industry technologies are all in Canada.
About 135 publicly traded companies with a combined market value of $60 billion CAD make up the industry. Canada holds the industry advantage for now, but this may change if the US, with its larger companies and broader market, ever enters the cannabis business.
Canadian companies are taking advantage of this global industry leadership position, and are beginning to export to other countries, especially in Europe, supplying a growing medical cannabis market. Over a dozen countries have recently legalized the use of medical marijuana including Germany, Czech Republic, Poland, Australia, Mexico, and Italy; several countries are also currently considering following suit.
As of this past January, seven Canadian companies have been granted licenses to export cannabis and cannabis oil. Industry regulators and suppliers in other countries are turning to Canada as the place to source safe cannabis to meet their local demands. A report released last November, valued the European cannabis market at $84 billion CAD a year; Canada is well placed to tap into this market.
Canadian companies are also pursuing global expansion in the countries where medical cannabis use has been legalized, by purchasing and partnering with local companies to better access those markets. Examples include Tilray’s construction of a 30-million-dollar production facility in Portugal and Aurora’s purchase of pharmaceutical supplier Pedanios. These companies have honed their industry and technology expertise in the domestic market and are able to quickly hit the ground running in foreign markets.
The burgeoning Canadian cannabis industry is also creating jobs across the country. Smith Falls, a once-struggling small town close to Ottawa, has seen its economic fortunes turn around, because of the presence of Canopy Growth Corp., a leading Canadian cannabis company. The company is said to have created 800 new jobs in a town of 9,000 people, since it came to the community five years ago.
Canadian cannabis companies have reportedly been on a hiring spree in anticipation of legalization. In fact, some companies are struggling to fill several positions. One such company, Aphria, revealed recently that a lack of qualified local labour left them unable to fill all their open greenhouse positions, leading to delays in harvesting.
The amount of jobs and businesses created may, however, also be affected by provincial industry regulations. For instance, Doug Ford’s recent scrapping of the previous provincial plan to sell legal cannabis through the LCBO, while troubling for those who favour strictly regulated access to cannabis, might lead to a proliferation of small retail businesses and attending jobs.
Regulatory regimes differ from province to province. In Manitoba, private retail and online stores will sell cannabis to the public, while Manitoba Liquor and Lotteries, a government agency, will centrally manage the supply. Other provinces that will allow private retail and online stores to sell to the public include Alberta and Saskatchewan.
Cannabis will be sold exclusively through government-operated physical and online stores in Quebec, New Brunswick, Prince Edward Island, Nova Scotia and the Yukon. British Columbia, however, will use both government-operated and privately-run stores, while, the Newfoundland and Labrador provincial government will directly control only online sales. All provinces and territories except Quebec and Manitoba also allow individuals to privately grow up to four plants per home.
One of the arguments for the legalization of cannabis was that it would eliminate the black market, and bring into the mainstream, the cannabis shadow economy. This integration of the cannabis economy would then provide tax revenue for the government and convert criminal activity into profits for legitimate businesses.
There is, however, a growing consensus that legalization will not eliminate the black market, at least not immediately. This is reiterated in the opinions of some York students interviewed anonymously. One student says she will still buy from her dealer if his price is cheaper, and because buying from this particular dealer comes with the added convenience of operating beyond standard business hours. She also says that even if his price is more expensive than in the stores, she may still buy from her dealer if the stores are too far away from her.
For another student, price is also paramount. He says he can get good quality cannabis from his dealer at almost half the price offered in dispensaries, if buying in bulk.
Price and accessibility are key factors in the elimination of the black market, and tight regulation may adversely affect both, leading to the failure to achieve the goal of elimination.
A Deloitte survey, conducted in March of this year, found that only 63 per cent of Canadians planned to abandon their existing suppliers, and buy cannabis from legal channels. This survey also found that Canadian cannabis consumers were willing to pay up to $8.98 per gram. The current average price per gram on the black market is $8.24.
According to Farrokh Zandi, professor of economics at the Schulich School of Business: “Many buyers of illegal weed will likely have little incentive to switch to legal weed, which is expected to be more expensive and less available because of strict regulations on sales.” He goes on to say that: “Illicit retailers will compete with new but very limited number of legal outlets,” but that “legal sellers will be able to compete on price in the next few years as regulations loosen and legal supply networks grow.”
All the levels of government in Canada are hoping to boost their revenues through taxes on cannabis, but if the excise taxes imposed are too high, the black market will continue to thrive.
The current cannabis tax regime combines a federal excise tax for producers and GST/HST to be paid by consumers, as well as other provincial mark-ups and levies.
Federally, the Canadian Revenue Agency (CRA) will issue a license to growers and producers, and they will be required to mark their products with an excise stamp to show that it is legally produced. Licensed producers are required to pay a federal excise duty to the CRA of $1 per gram or 10 per cent of the retail price, whichever is greater, once the cannabis product is delivered to the purchaser, i.e. provincially-authorized distributor/retailer, or final consumer.
The federal government has agreed to pass on 75 per cent of excise tax revenue to the provinces, but that has not prevented some provinces from setting their own mark-ups and levies. Manitoba, for example, has instituted a 75-cent mark-up per gram and will also charge retailers 6 per cent of their revenues as a social responsibility fee.
Municipalities across Canada are also pushing for their share of revenue, arguing that they will be primarily responsible for the social costs of legalization. The union of British Columbia municipalities passed a motion in September to request 40 per cent of expected cannabis revenue from the provincial government. Closer to home, the Ontario provincial government says it will allocate $40 million CAD to the municipalities, out of its expected $100 million CAD of revenue, in the first year after legalization.
Industry insiders are predicting a shortage in the regular market immediately after legalization, due to a host of supply-chain issues that the industry is still trying to work out. This could also be a boon for the black market.
A C.D. Howe Institute report released last week, estimates that Canadian cannabis producers will only be able to meet 30 to 60 per cent of demand at current production levels. This may mean that Canadians who are unable to get cannabis through legal channels will rely on black market dealers. The authors of the report, however, predict that the shortage will not last long, because the government will license more producers, and production capacities will increase over time.
Growing more cannabis to meet the Canadian market demand, thus, brings into focus the likely impact on the ecosystem and environment. As Canada is only the second country to legalize the use of recreational cannabis, It will act as a proving ground for a host of challenges associated with cannabis, including potential negative social and environmental externalities.
Business sustainability professor, Mike Valente, of the Schulich School of Business, suggests that “questions will likely emerge around the potential displacement of existing land that could be reserved for large amounts of cannabis production.” He says that the pests that tend to come with monocropping may “lead to the need for more intensive chemicals and pesticides, which may have important implications for ecosystems and human/species health.”
Also, there is the social cost of cannabis legalization. More intrusive policing measures are being put in place constantly, both federally and provincially, to prevent people from driving after using cannabis. Federal impaired driving laws were recently revised to give the police more power to stop drivers and conduct roadside intoxication tests. This is a social trade-off that Canadians will have to face from now on.
Draconian cannabis prohibition laws in the US may also pose problems for frequent Canadian travellers. US border officials are not making any accommodation for Canadians travelling to the US, and cannabis users may feel the need to lie when asked about their cannabis use/investments or possibly be prohibited from entering the US. Fibbing may be of no assistance to Canadians if border officials are able to track cannabis purchases through credit card history. This potential restriction of travel may negatively impact Canadian businesses, considering that they do most of their international trade with the US.
The adverse effects of cannabis use on health is another potential social cost. Provincial health care costs may rise if cannabis use significantly increases as a result of legalization. Cannabis is known to have harmful effects on the brains of children. Keeping cannabis out of the hands of minors might become more difficult now that it is legalized. Cannabis use may also potentially harm the lungs of smokers and people around them who are exposed to secondhand smoke.
Broader questions about the effect that cannabis legalization will have on productivity in the workplace remain to be answered. Additional laws may be required to regulate how employers treat cannabis users and ensure that everyone’s rights continue to be respected in the workplace.
Overall, if the environmental and social externalities are managed in a strategically smart and responsible fashion, cannabis legalization can be a largely positive move for the Canadian economy and society. The jobs and businesses that this new industry will create can boost economic activity and provide an avenue for Canadian businesses to attain global acclaim.
The federal and provincial governments must, however, not become so distracted by the potential for new revenues from the industry, that they begin to err on the side of over-taxation and over-regulation, as this will only encourage the persistence of the black market. There is a need to extract revenue through taxes to deal with the social and environmental costs of legalization, but a balance must be struck to ensure that cannabis consumers do not turn to less-safe sources, as this will only compound the social costs.
