INSIGHTS BLOG > Creating a Better Framework for the Cannabis Industry

• What Regulators Envisioned
• Complications
• What Regulators Got
• Creating a Better Framework for the Cannabis Industry

Cannabis markets are a big hot mess. 

While we wait to hear about cannabis rescheduling and updates to the Farm Bill, the industry is at war with itself. Decisions on both issues may certainly provide some clarity. Yet, as complexity breeds opportunity, the vast complexity of the cannabis plant will continue to drive suppliers to game whatever new rules become established. 

My curiosity and interests drive me to wonder: What might a framework for the cannabis industry look like that would generate better outcomes for everyone involved?

What Regulators Envisioned

At the most basic level, regulators have tried to partition cannabis plants and plant products into two separate markets, hemp and marijuana (“cannabis”), each under vastly different regulatory regimes. As a simplistic visual representation, what regulators tried to create is something like what’s depicted in Figure 1, two distinct, clearly defined and bounded markets:

Figure 1

Complications

However, the basis of the distinction between the two markets, level of THC, is an unnatural differentiator. Plant genetics do not produce plants that have either no THC or positive levels of THC; rather, all plants have some THC, with greater or lesser amounts, depending on a wide variety of factors, including genetics, cultivation environment, and time of harvest. 

Moreover, the distinction regulators used to separate market supply, THC level, is not aligned with market demand: Regulators focused on trying to control the supply of a particular intoxicating compound, whereas demand is focused more generally on intoxication. This mismatch has enabled many suppliers to reframe their offerings away from THC and towards other intoxicating compounds. 

And, of course, in addition to all the ambiguously legal activity, there is also outright illicit activity.

What Regulators Got

So then instead of the nice clear distinction regulators wanted (as depicted in Figure 1), what regulators actually got is something more like the continuum of activity depicted in Figure 2.  

Figure 2

The continuum in Figure 2 is based on the particular compounds contained in the products being sold (see Figure 3):

• Hemp: Naturally-derived hemp compounds, including CBD, CBG, CBN, and CBC

• Hemp-Cannabis: Intoxicating compounds, both naturally-derived THCA and/or semi-synthetically-derived delta 8, delta 10, etc.

• Cannabis: Licensed and Compliant products containing naturally-derived THC

• Noncompliant Cannabis: Licensed but noncompliant (i.e., not reported and/or not taxed) products containing naturally-derived THC

• Illicit: Unlicensed and noncompliant naturally- and semi-synthetically-derived THC 

Figure 3

The tensions in the industry captured by the continuum in Figure 3 fails to include another battle taking place, that over the (presence and) accuracy of cannabis testing. This latter battle adds another dimension to that captured in Figure 3. We could use height as a measure of accuracy of cannabis testing, where higher bars represent more accurate testing, and lower bars represent less accurate or no testing. Figure 4 attempts (oh to be a better graphic designer…) to depict accurate testing in a portion of hemp and cannabis products, with no or inaccurate testing in illicit markets. 

Figure 4

Creating a Better Framework for the Cannabis Industry

Now that I have a better conceptualization of the problems in cannabis, I can return to the question originally posed: Given the current situation, how could we create a framework for cannabis markets that leads to better outcomes? 

A General Framework

Return to the challenge of creating market design mechanisms that generate good social outcomes. I’ve create a method (template) that’s applicable to most markets for creating a framework that will achieve good outcomes. Markets involve collections of buyer and seller transactions, where these transactions take place within a particular environment — which is constantly evolving — that shapes the outcome of the buyer-seller interaction. My method separates the environment into four distinct, yet overlapping and constantly evolving components (see Figure 5):

• The People component represents what we want. We have specific wants and needs, and the actions we take to satisfy those needs are shaped by culture, norms and values, together with what’s available (which is determined by Markets and Technology) and what’s allowed (Government). 

• Technology determines what’s possible, that is, it’s a potential or upper bound on the activities society can undertake.

• Markets supply what’s valued by people and what’s cost effective to produce, where cost-effectiveness is shaped by Technology and Government.

• Government determines what’s allowed, which is shaped by culture (People), what’s possible (Technology), and what’s cost effective (Markets).

Social outcomes are emergent phenomena that are determined by the combination of the People, Technology, Markets, and Government prevailing at a point in time. Clearly, as People, Technology, Markets, and/or Government change, so too will the outcomes that emerge.

Figure 5

A Framework for Cannabis

So now if I apply my Four Systems methodology to cannabis, I surmise that (see Figure 6):

• Cannabis Buyers want therapeutic and/or intoxicating effects from cannabis at low prices and with easy access.

• Cannabis Technology includes: 
  • Cultivation of increasingly diverse compounds in plants that may or may not yield flower containing toxic pesticides, fungi, and/or heavy metals;
  • Extraction methods, which may or may not use toxic solvents;
  • Conversion/Processing, which may or may not use toxic solvents or other chemicals (e.g., vitamin E acetate); and
  • Testing, where methods may or may not fail to detect certain compounds and/or yield inaccurate estimates of compound levels.

• Cannabis Markets supply products containing any number of different compounds desired by buyers that are profitable to produce, where costs include any risks associated with unlicensed/noncompliant/inaccurately tested activity.

• Cannabis Regulators establish licensing fees and eligibility, tax rates, product testing, reporting, and other regulations, which they may or may not enforce.

Figure 6

The purpose of laying out the information presented in Figure 6 is to provide an understanding of the potential actions and incentives for different participants in the cannabis industry. While Government establishes laws and regulations, Markets may not comply with those regulations, if available Technologies enable suppliers to profitably satisfy the demands of People. It follows that a good framework for guiding industry activity considers the potential actions and incentives faced by all industry participants and establishes rules of the game under which the actions that industry participants are led to take are precisely those that are socially desirable.

In the current market environment, lack of clarity and enforcement of laws and regulations is creating friction among market participants, specifically: 

• Lack of clarity as to whether THCA and conversion cannabinoids are considered hemp or cannabis products;

• Lack of enforcement of noncompliant and unlicensed activity; and

• Lack of enforcement of accurate and complete product testing.

At the same time, there are a couple of factors that are exacerbating the frictions among market participants, including: 

• Lack of safety information on conversion cannabinoids. This sounds like the typical “we need more research” complaint that so many in the traditional healthcare community have been espousing and using to justify their reluctance to support medical cannabis. However, I would argue there’s a difference between natural cannabis and semi-synthetic and synthetic conversion compounds: There are thousands of patient-years of real world evidence in support of the safety and efficacy of natural cannabis, but very little is known about the long-term effects of unnatural forms of cannabis, compound by-products, and other chemical additives used in cannabis, especially when they’re smoked or vaped.

• Lack of consumer awareness or understanding about important cannabis issues, including the facts that: most hemp products are not tested, tested hemp or cannabis products may not reflect accurate levels of cannabinoids and/or toxins, and little is known about the safety of semi-synthetic and synthetic conversion compounds and their associated by-products.

Many markets have naturally correcting mechanisms that make it unprofitable for suppliers to continue to engage in the undesirable types of activities currently being conducted in cannabis, such as: 

• More clarity about, together with enforcement of, laws and regulations; 

• Better information and consumer awareness about long-term product safety, together with product liability laws; and 

• Standardized testing requirements. 

Unfortunately, for the most part, these more typical market-correcting mechanisms don’t (yet) exist in cannabis, leading suppliers to continue to provide potentially illegal and/or dangerous products.

Recently, the U.S. House Committee on Agriculture approved an amendment to the 2024 Farm Bill draft that would ban intoxicating conversion compounds.^[1] So then would such a ban, together with enforcement of the other laws and regulations solve the current tensions in cannabis markets? Probably not. Figure 6 notes that (i) the technology exists to provide cheap and easily available intoxicating compounds and (ii) consumers want those products. Importantly, we also know that illicit markets continue to thrive — despite the existence of licensed markets — precisely because they offer consumers cheap and easily available intoxicating compounds. Notably, studies show that demand for delta 8 products are higher in areas where people have less access to licensed cannabis products.^[2] It follows that any ban on conversion compounds would probably not eliminate their supply or use, as long as licensed markets limit access and/or involve high prices of intoxicating compounds.

So then what’s the solution? 

As I see it, given the situation depicted in Figure 6, at this point, the best social outcomes — maximizing legal/licensed and compliant activity — would only be achieved by: 

(i) Enforcing testing of all hemp and cannabis products, and

(ii) Increasing access to licensed cannabis activity, while

(iii) Lowering the burdens on legal/licensed and compliant hemp and cannabis activity, and also

(iv) Educating people about the benefits of naturally-produced, clean, tested products, together with the potentially unknown risks of conversion compounds. 

Taken together, these actions would lead to better social outcomes for all industry participants by enabling more suppliers to participate in legally providing naturally-produced intoxicating compounds (THCA and THC) that better compete with intoxicating conversion compounds, while enabling consumers to make informed decisions as to which products best suit their needs.

References

^[1] House committee votes to include intoxicating hemp ban in draft Farm Bill. MJBizDaily. (2024, May). https://mjbizdaily.com/house-committee-votes-to-include-intoxicating-hemp-ban-in-draft-farm-bill/

^[2] Livingston, M. D. et al, Popularity of Delta-8 THC on the Internet Across US States, 2021. Am J Public Health. (2022, Feb). https://pubmed.ncbi.nlm.nih.gov/35080939/. Wilson-Poe, A. R. et al, Past-Year Use Prevalence of Cannabidiol, Cannabigerol, Cannabinol, and Δ8-Tetrahydrocannabinol Among US Adults. JAMA Netw Open. (2023). https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2812825