Considerations for Legalisation (Pt 1)
As more European countries legalise recreational cannabis, decisions about how the market should operate, which products to permit, where supply will come from, and how to balance international legal obligations become ever-more pressing.
In collaboration with the international law and business services firm Ince, we explore the major considerations operators are contending with on this side of the Atlantic - highlighting legal, political, financial, and public safety perspectives.
This is the first instalment of a two-part blog series.
UN Drug Control Treaties
UN international drug treaties are a major elephant in the room when it comes to meaningful cannabis reform. Almost all nations in the world are signatories to three international treaties that require countries to control drug production and supply in order ‘to limit the use of narcotic drugs exclusively to medical and scientific purposes’.
Combined, the UN treaties establish rules on the production, supply and trade of over 250 psychoactive substances, drug precursors and plants. Cannabis, cannabis resin, THC and its isomers and dronabinol (delta-9 THC) are all scheduled and controlled under these treaties.
UN treaties allow some flexibility in domestic cannabis regulations - such as an exemption for industrial hemp, and no set severity of punishment for cannabis offences. They have also been interpreted by some countries to allow personal cannabis possession and cultivation, if prohibiting them would in turn violate that country’s constitution.
However, clear limits remain to what the treaties will allow, with a requirement for countries to criminalise the production, distribution and sale of cannabis - leaving no leeway for legalised, commercial cannabis markets for recreational use.
The Netherlands, USA, Uruguay and Canada all have cannabis frameworks that contravene the UN treaties and have been publicly condemned by the International Narcotics Control Board (INCB), the UN drug treaty watchdog. Reform has also provoked strong criticism from countries with a hardline stance on drug prohibition, such as Russia, who have accused legalising countries of hypocritically undermining the rules-based international order. However, with no real prospect of UN sanctions for breaching treaty obligations, the consequences for doing so are more political than literal.
As more countries look to legalise, the question of how best to address these treaty tensions grows in importance. A number of options are available, which are outlined at the end of this series.
2. European Union-level Constraints
EU rules and laws form another layer of supranational governance for Member States to navigate.
Of particular relevance is an European Council 2004 Framework Decision (2004/757/JHA) that requires Member States to make the cultivation, production, distribution, sale, import & export of drugs - including cannabis - a punishable and criminal offence.
Introduced to establish minimum & maximum penalties across the EU as part of a harmonised approach to drug tracking, the framework decision risks derailing EU members’ attempts at comprehensive commercial cannabis legalisation.
Personal cultivation, production and possession are explicitly exempted from the scope of the framework, however - leaving clear latitude for European reform in these areas.
While UN treaty requirements can be breached without direct sanction, enforcement and commitment mechanisms are stronger at the EU level and include heightened diplomatic pressure and the risk of significant fines.
Luxembourg’s decision to roll back on commercial legalisation is a direct reflection of the challenge of keeping within current EU rules, while the Maltese model of modest reform similarly reflects the reality of EU and UN constraints.
With Germany anticipated to pursue more comprehensive legalisation, expect growing jurisprudencial debate on what exactly EU frameworks can and cannot accommodate - and whether there’s political appetite to challenge, reform, reinterpret or simply overlook the current rules.
3. Models of Cannabis Regulation
Rules as to where cannabis sites or stores can be situated, restrictions on product types or potency, who is permitted to grow cannabis and where it can be consumed can all be used as tools to shape the market. Legislators can achieve a wide range of outcomes through the model of regulation introduced:
State Production: The government production of cannabis products to supply recreational markets. While there are examples of state-managed or controlled production in medical cannabis, to date no state operations are directly involved in the production of cannabis products for recreational markets.
State Sale: Government-owned or managed retail sales of cannabis. This model is prevalent across Canada, where a number of Provincial and Territorial governments are involved in the cannabis supply chain. Examples of government involvement include the wholesale of products for onward supply to private or government stores, exclusive rights to online sales, and government-owned retail stores.
Commercial Production: Cultivation and manufacturing of products by private companies. There is scope for significant variation within this model: The number of permitted operators may be tightly fixed by government and awarded by tender, as per German cultivation within medical markets. Alternatively, a more free market approach can be adopted, with production licences awarded to any operator that meets the regulatory criteria (on security, site and product quality etc). Product formats and potency may also be fixed, as in Uruguay, and production quotas, canopy or facility size restrictions may also be imposed.
Commercial Sale: This can take place through retail stores, usually stores or ‘dispensaries’ specifically authorised to sell only cannabis products. Retail sales can also include online ordering with postal delivery and courier delivery by local stores, subject to ID verification and age checks on delivery. Alternatively, sales can be managed through other channels such as pharmacies, as per the case in Uruguay.
Home Grow: Some jurisdictions may opt to legalise the personal possession and cultivation of cannabis, but still seek to prevent wider forms of at-scale or commercial production. Restrictions may still apply as to the visibility of any plants grown, and landlords and building owners may still be able to restrict cannabis cultivation and use.
Co-operative / Not-for-profit Production: Adapted from models existing under decriminalisation/ toleration, co-operative production or ‘Cannabis Social Clubs’ allow an association to cultivate cannabis on behalf of its members and supply it to them. Membership registration is required, with potential limits on the number of members that a group can have, and how much cannabis each member can purchase. Membership or product fees can be charged to cover the costs of labour, resources and production, but associations must be registered non-profits.
4. Product Format Roll-out
As recreational markets develop across Europe, legal and physical infrastructure needs to account for the broad set of product formats that consumers are accustomed to. Flower still holds the title for the most popular format across Europe and North America, but regulators need to consider how edibles, concentrates, vapes, and beverages fit into new frameworks.
Some argue that a staged approach, such as the Cannabis 1.0 and 2.0 model adopted in Canada, would allow for producers, consumers, wider society and authorities to adapt in stages, scaling up to more advanced formats as the market develops. Conversely, limiting consumer choice and offering no regulated route for access to these formats could seriously hamper conversion from the illicit market - and may just be kicking regulatory concerns down the line.
Pilot project organisers in the Swiss experiment are permitted to include any product formats in their trials if approved. The Dutch coffee shop experiment permits the production of flower and hash, but no other concentrates like shatter or wax can be manufactured.
Countries such as Luxembourg, which will initially be legalising only home cultivation, could become a welcome home for small-batch extraction and edible making kits - given the lack of formal, regulated access to these formats.
Consumer use patterns mature and adapt alongside the market as it develops, so both regulators and producers need to remain nimble to accommodate evolving demand.
So far, the prospect of new cannabis formats is not a major draw for Europeans - our polling finds that even amongst Europeans who support legalisation, only 26% considered new product formats to be a benefit of legalisation.
EXAMPLE COSTS AND MARGINS FOR CANNABIS PRODUCTION IN BRITISH COLUMBIA
5. Pricing and Taxation
Taxable revenues are often seen by government and voters as a key benefit of introducing a regulated framework, but excessive taxation is a quicker way to hamper the market before it has a chance to be successful. A fine line needs to be struck between supporting the commercial viability of the market, illicit market capture, and government incentives to maximise tax revenue and avoid promoting consumption.
Current consumers typically do not struggle with availability of illicit market cannabis and are often happy with the quality of product they can obtain, so price remains the key driver for many when considering switching to legal supply.
As seen in some European medical cannabis markets, governments may implement state control over pricing, either by mandating a set price or minimum and maximum price controls. Several tax mechanisms could be implemented, ranging from a fixed rate to a tax based on THC content or unit weight.
Some argue that tobaccos’ tax framework should be applied to cannabis, often facing backlash from the industry about the negative impacts of such a stance. An indication of the impact this could have can be seen in Belgium, where following the application of tobacco taxes to CBD flower in 2019, the number of CBD retailers reportedly fell almost tenfold from dramatic declines in margins.
If supplying commercial legal markets becomes an unprofitable venture, the taxation model should be subject to question. In states like California, where taxes can reach 50% and wholesale prices are dropping, legal producers are allegedly resorting to ‘double dealing’ into the illicit market to subsidise legal sales - a case study that should not be overlooked by Europe.
6. Promotion and Packaging
The extent to which recreational cannabis brands should be allowed to market, brand and promote their products is hotly debated. The spectrum of tolerance varies from plain packaging and extensive health warnings with a total ban on promotion to a free market approach, with minimal restrictions on packaging and advertising.
Arguments to support plain packaging include not encouraging consumption, creating a more equal playing field between craft producers and large corporations, and preventing confectionary-style products entering the hands of children.
There is also strong rationale for permitting branding and advertising in a similar manner to alcohol. Branding is a key component of market mechanics, used to signify quality and values and facilitate consumer choice. Removing brand appeal from regulated cannabis products can hamper the legal industry in converting illicit market consumers - a key challenge in the Canadian market, where opaque, child-proof plain packaging with health warnings is used.
Findings from Canada, including a 2018 study comparing the impacts of plain packaging to branded packaging, indicate that plain packaging and health warnings typically increase health knowledge among young adults, but reduce brand appeal.
From draft frameworks in Switzerland, the Netherlands and the initial commercial plan in Luxembourg, it appears Europe will take a restrictive approach to cannabis promotion and packaging - but upcoming legal markets like Germany could explore a different approach.
7. Banking Access
Access to reliable banking has been a major hindrance for companies operating in recreational cannabis to date - in the US due to federal illegality, and quasi-legal European markets in the Netherlands and Spain. Significant uncertainty comes with running a cash-reliant business, or the ongoing risk of bank accounts being terminated.
We assume that legal European markets, like those emerging in Switzerland, Luxembourg and Germany, will have access to federal level banking, a major advantage over early stage US operations.
Similar to US operator reliance on state-level banking solutions, cannabis retailers in the Netherlands - the only commercial, long- established European market for comparison to date - have turned to national banks. According to the results of a 2017 investigation by Financieele Dagblad and Investico, the four largest Dutch banks had lent coffeeshop owners a total of €1.1bn using 170 stores as security.
Coffeeshops have faced decades of banking shocks. In 2008, financial giant ING Group’s Postbank closed all shop owners accounts and began screening for cannabis-linked activity. As of 2021, ABN AMRO, which services around half the country’s coffeeshops, raised its bank charges for shop owners by 1000% to cover the costs of complying with anti-money laundering laws.
Production licence applicants in the coffeeshop supply experiment are still experiencing difficulties, but a legal precedent is beginning to take shape for others to follow. ‘Project C’ was refused a bank account multiple times following several risk assessments. The company decided to initiate legal proceedings, and the bank was deemed to be required to open the bank account.
8. THC Units and Caps
Policies also need to consider public health recommendations, such as establishing THC units and set servings. Fixed units can help mitigate the risks of high potency consumption by allowing consumers to gauge comparative doses across different formats.
Some argue that protective measures should go further, and that limits should be placed on the maximum level of THC in legal products. THC caps have been implemented in Uruguay, the Swiss recreational experiment and in the US state of Vermont, with similar bills in discussion in other states.
Strong tensions lie between health concerns and demonstrated consumer preferences in the US and Canada, with clear demand for 30%+ THC flower, concentrates, and infused pre-rolls. THC limits may drive consumers accustomed to high potency products to the illicit market, denying them access to regulated, safe products.
Similar questions arise around the permitted potency of edibles, and where the reasonable limit lies for restrictions. Legalisation in Colorado was followed by reports of edible overconsumption, and regulators rushed to introduce dosing and packaging controls. On the other side of the spectrum, Canada’s 10mg THC limit per edible unit or beverage is criticised for being too low.
Questions also remain around how THC caps would work practically with hash, a key segment of the Dutch and wider European market.