Emblem Corp’s (EMBBF) Gordon Fox on E-Commerce Pot Delivery.

Emblem Corp website.

By legalizing adult recreational marijuana use, the government wants to eliminate the cannabis black market. Unfortunately, as currently conceived, its new regime falls well short of that objective.

The Canadian government intends to legalize cannabis by July 1, 2018, making adult recreational marijuana use legal throughout Canada. This change does not mean all cannabis will be legal; only marijuana produced by federally-licensed entities will be. Ottawa’s licensing regime will ensure that all lawful cannabis is, in effect, medical grade, free of microbial contamination, toxins and other illicit substances sometimes found in “street” marijuana.

A principal objective of the new regime is to eliminate the black market distribution of cannabis. Unfortunately, as currently conceived, the new regime may fall well short of that objective.

The illegal market promises to be a very potent competitor for the new regime. Illicit cannabis is widely available throughout Canada. Consumers have access to a variety of products that are sold by dealers with whom they are comfortable, and at prices they find acceptable.

The C.D. Howe Institute and others have repeatedly warned that, to be successful, the new regime must be price competitive (after taxes) with the illicit market. But price is not the only consideration. An equally important—but so far overlooked—factor is ease of consumer access and product choice. Cannabis products are readily available “on the street,” in unlawful dispensaries and over the Internet. The illicit market even has a robust home delivery component. The new legal regime must not simply compete with this illicit market on price; it must be competitive in terms of the whole consumer experience.

The federal government’s current approach under the proposed Cannabis Act allows the provinces to regulate the distribution of adult recreational cannabis through licensed or government-owned retail locations. Since many provinces may not have retail locations ready for July 1, 2018, Ottawa is contemplating a temporary e-commerce delivery system, through which Canadians will be able to order lawful cannabis from licensed producers over the Internet (just like they can with many other consumer products). Lawful medical cannabis has been safely delivered this way for years without evidence of diversion. However, comments by various government representatives suggest the government intends to put an end to this e-commerce model once provincial retail stores are in place.

Terminating this e-commerce system would be a huge mistake. For a number of reasons, a robust, permanent e-commerce platform is necessary to displace the illicit market. For one, traditional retail distribution will add considerably to the cost of recreational cannabis compared to e-commerce. Many commentators have suggested it could double the price—before tax. Some consumers enjoy the experience of retail shopping for cannabis in bricks and mortar settings, and will be prepared to pay the premium associated with traditional retail. Others will not, and will opt for illegal cannabis if it is the only cheaper alternative.

Second, distribution restricted to retail stores would be inconvenient for many Canadians, especially those living outside major urban centres. E-commerce delivery is the most effective way for these consumers to obtain cannabis. Finally, cannabis is not like beer or wine, which can remain stable in bottles for years. It’s a botanical that begins to change within 60 days of packaging. As with all perishable products sold in retail environments, variety and choice will be lower in smaller markets. E-commerce delivery would enable these consumers to access a greater range of products. All of these factors—price, convenience and choice—will create an incentive for consumers to use the illicit market if “bricks and mortar” retail distribution becomes the only method of delivery for legal cannabis.

The federal government is the only level of government with the constitutional authority to govern the e-commerce delivery of adult cannabis, as the undertaking involves a regulated substance, inter-provincial trade and commerce, and mail: all federal areas of responsibility under the Constitution Act, 1867. In making provision for a permanent e-commerce model, though, the new Cannabis Act should still allow for retail distribution. Consumers should simply be able to choose between purchasing cannabis in stores or online. The provinces and cities could maintain responsibility for the retail sale of cannabis “at the street level,” since these local undertakings are quite properly within their purview.

Canada’s licensed producer industry operates at a disadvantage to black market distributors: we are required to produce the highest quality, medical grade product in the world; we are obliged to comply with the laws applicable to all businesses generally; we are fully taxable; we are charged with the collection of HST, and soon, excise and “social responsibility” taxes as well. The black market faces none of these constraints. However, our industry has one huge advantage: we don’t have to hide. As a result, we can produce at a scale that allows us to be cost-competitive with the illicit market, even after the imposition of taxes.

To eliminate Canada’s cannabis black market, the one remaining change our industry now requires is the ability to deal directly with consumers.

Canadians should reach out to their MPs and Senators to ensure that the Cannabis Act incorporates a robust, permanent e-commerce platform that allows all Canadians to interact directly with licensed cannabis producers of their choice. By so doing, we’ll take a monumental step toward eliminating the black market and organized crime from cannabis distribution in Canada, once and for all.

Gordon Fox is a lawyer and businessman residing in Toronto. He is the CEO of Emblem Corp. a public company. Emblem Corp’s wholly-owned subsidiary Emblem Cannabis Corp. is a licensed producer of medical cannabis under the Access to Cannabis for Medical Purposes Regulations.

Read Full Opinion Article at National Post.

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