The Business Section: Three lessons learned from Canada’s legalization rollout
October 17, 2022 By Michaela Freedman
Canada was the first country to federally legalize recreational cannabis, making it accessible to adults of legal age. Besides Uruguay and a few U.S. states, Canada did not have many leadership examples to follow when developing its legal system, so naturally, the system has some flaws.
The strict nature of the Cannabis Act, which came into force on October 17, 2018, was crafted through a public health lens, aiming to accomplish three goals: keep profits out of the pockets of criminals; prevent underage use; and provide adults safe access to legal cannabis.
In the four years since legalization, the Canadian market has seen considerable expansion and growth, yet this has been at the expense of the industry and the businesses driving it.
Legal operators are subject to intense regulatory and tax structures, making it difficult to compete with the legacy market due to inflated fees and tight margins.
On top of the legacy operators deflecting taxes, they also have no restrictions on potency or types of products they can manufacture.
Meanwhile, legal operators have been calling upon government to address cannabis taxes and THC limits on packaged edibles and are still waiting for Health Canada to conduct its mandatory three-year review of the 2018 legislation.
The Canadian government, specifically the federal Department of Innovation, Science and Economic Development, proposed a new cannabis strategy table that would involve collaborating with industry stakeholders to foster economic growth.
That the cannabis industry must work separately with different departments (which has yet to happen) is a perfect example of the failure of government agencies’ ability to work in tandem.
At the same time beyond Canada’s borders, cannabis liberalization is growing.
Other governments are taking more pragmatic approaches to developing systems that better integrates and fosters industry — Switzerland and the Netherlands are two examples of this.
Both countries are carrying out recreational pilot trials to better understand the effects of controlled access to cannabis. As cannabis reform becomes a global phenomenon, a lot can be learned from Canada’s legalization rollout.
Beyond the burdensome taxes and fees, there are additional factors that must be prioritized if governments want to achieve cannabis reform while fostering economic growth. Here are three facets that international policymakers should implement from the get-go:
Prioritize medical cannabis
Health Canada has chosen not to distinguish between medical and recreational cannabis.
Medical cannabis is subject to the same excise duty and sales taxes as recreational products, and this has disincentivized patients to renew their prescriptions. As a result, licensed producers have shifted their focus away from medical.
In Europe, even when recreational legalization happens, the medical market will still have huge market potential. For example, in Germany and Italy, many patients receive insurance coverage and access their cannabis medication from pharmacies, as opposed to canna-clinics.
The wider adoption of medical cannabis is a huge benefit to legal producers who are more likely to have repeat buyers with higher average order values.
Cracking down on illegal sales
Legalization has helped reduce illicit sales somewhat, but it’s still very easy to access non-legal cannabis products from illegal dispensaries and providers.
The lack of law enforcement not only hurts legal businesses, but also allows for unsafe products to get into the hands of consumers, which is exactly what Canadian policymakers wanted to avoid.
It’s imperative for governments to develop robust enforcement protocols for cannabis, like they do with alcohol, in order to benefit public and economic health.
Increase environmental sustainability
Despite Health Canada’s commitment to public health, it has made no consideration to the environmental impacts of cannabis production.
Canada has granted more than 850 licenses to produce and sell cannabis to a country with a population of under 40 million. Our market is oversupplied with a surplus of unsold product.
In December 2021, Health Canada reported the total inventory of packaged units of dried cannabis represented 3.7 times the total sales. This doesn’t even include unpackaged units!
To make matters worse, there is no prescribed method for cannabis disposal, resulting in a lot of unsafe waste. Capping licenses may be problematic, but cannabis packaging is a more addressable problem.
Health Canada mandates that cannabis packaging be child-resistant, include a security seal, and be large enough to accommodate a label with the proposed requirements.
Environmentally friendly options are limited and costly, forcing most producers to use low-cost plastic packaging.
If governments do not address the environmental costs of cannabis production, the industry is well on track to becoming a major contributor to climate change — the biggest threat to humanity.
Despite Canada’s shortfalls, we are still leading the global cannabis industry, and have inspired many countries. Yet the Canadian government has failed to collaborate with cannabis firms — a vital step in creating a sustainable, viable industry.
As other jurisdictions move closer to legalization, they could learn from Canada’s regulatory oversights, and create a framework that can out-compete the entrenched legacy market while also prioritizing and facilitating public, economic, social, and environmental health.
Michaela Freedman is the owner of MF Cannabis Consulting, which helps businesses perform successfully in the global cannabis market. With her vast industry experience, she advises brands and new entrants on market entry strategies, while also developing new business opportunities for established cannabis firms.
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