United States Federal Cannabis Reform is on the Horizon: What are the Implications for Canada

Introduction

The legal status of cannabis in the United States is in a state of flux. Despite a growing number of states legalizing cannabis for medical and recreational use, it remains classified as a Schedule I substance under the Controlled Substances Act (CSA). This classification presents significant legal and regulatory challenges, prompting ongoing discussions about legalizing or rescheduling cannabis at the federal level.

Current Classification under the Controlled Substances Act

The CSA categorizes drugs into five schedules based on their potential for abuse, accepted medical use, and safety. Schedule I substances include heroin, LSD, MDMA and cannabis, all of which are deemed to have a high potential for abuse, no accepted medical use, and a lack of accepted safety for use under medical supervision. This classification has serious implications for research, access, and regulation of cannabis.

State-Level Developments

Well over half of U.S. states have legalized cannabis for medical purposes, and numerous states have also legalized it for recreational use. This state-level legalization has created a patchwork of laws, with some states actively regulating cannabis while federal law remains unchanged. The disparity between state and federal law complicates enforcement, banking, and taxation for cannabis businesses. Several states have taken proactive steps to advocate for federal rescheduling. State legislatures have passed resolutions urging Congress to reconsider cannabis classification, highlighting the disconnect between state laws and federal policies.

Public Opinion and Advocacy

Public opinion on cannabis has shifted dramatically over the past few decades, with a majority of Americans now supporting legalization. According to Gallup, 70% of U.S. adults favour legalization and believe that cannabis is less harmful than cigarettes and alcohol.

Advocacy groups are increasingly vocal about the need for rescheduling, arguing that the current classification is outdated and not reflective of societal attitudes or scientific understanding.

Federal Legislative Efforts

In recent years, there have been multiple legislative proposals aimed at rescheduling or descheduling cannabis. The Cannabis Administration and Opportunity Act and the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act are two significant bills that seek to remove cannabis from the CSA entirely. While these bills have garnered support in Congress, they have yet to pass both chambers.

The Executive Branch

President Joe Biden

President Biden has expressed support for reviewing the federal classification of cannabis. In October 2022, he announced a series of actions, including pardoning individuals with federal convictions for simple cannabis possession and calling for a review of cannabis’ Schedule I status. Since this time, the U.S. Department of Health and Human Services (HHS) issued a recommendation to the U.S. Drug Enforcement Administration (DEA) that cannabis be reclassified from Schedule I to Schedule III under the CSA, where there is a moderate to low potential for abuse, an accepted medical use and has moderate to low potential for physical and psychological dependence. Schedule III drugs include Tylenol (with codeine), ketamine, anabolic steroids and testosterone. Based in part on the HHS’ recommendation, the Department of Justice has proposed that cannabis be rescheduled from a Schedule I drug to a Schedule III drug. However, this effort hinges on the DEA’s administrative hearing, which is not scheduled until the new year. 

Vice President Kamala Harris

Vice President Harris has been a vocal advocate for cannabis reform. During her campaign for the presidency, she supported decriminalization and proposed a comprehensive approach to cannabis policy, emphasizing the need to address racial disparities in enforcement. The Vice President has promised to legalize marijuana at the federal level and earlier this month listed “legalize recreational marijuana” as the sixth item on her top priorities to-do list.

Former President Donald Trump

Former President Trump’s stance on cannabis has been more ambiguous. While he did not advocate for federal legalization, he expressed a degree of support for states’ rights to decide their cannabis policies. Recently however, Trump came out in support of adult-use legalization in his home state of Florida and said that “as President, we will focus on research to unlock the medical uses of marijuana to a Schedule III drug, and work with Congress to pass common-sense laws, including safe banking for state-authorized companies, and supporting states’ rights to pass marijuana laws.”

Summary

This is the first time in history that both candidates for presidency have indicated their desire to advance meaningful U.S. federal cannabis reform.

Size of the Cannabis Market

United States

As of 2023, the U.S. cannabis market is estimated to be worth approximately $30 billion, encompassing both medical and recreational use. The market is expected to grow significantly, projected to reach around $50 billion by 2026. This growth is driven by increasing legalization efforts at the state level, changing consumer attitudes, and the burgeoning acceptance of cannabis as a legitimate product.

Canada

Canada’s cannabis market, which became legal at the federal level in 2018, is currently valued at about $4 billion. It is anticipated to expand to approximately $8 billion by 2026, fueled by ongoing market maturation, product innovation, and increasing consumer awareness. Canada’s experience with legal cannabis could serve as a model for U.S. states looking to develop their markets.

Impact of U.S. Cannabis Reform on Market Growth

Legalizing cannabis at the federal level or rescheduling cannabis from a Schedule I to a Schedule III drug is expected to accelerate growth in both U.S. and Canadian markets and lead to:

1. Increased Legitimacy: If legalized or rescheduled, this would enhance the legitimacy of cannabis, encouraging broader participation in the market from both consumers and businesses. This could lead to substantial growth, particularly in the medical sector, where prescriptions and insurance coverage might become more common.

2. Broadened Market Access: For U.S. cannabis businesses, legalization or rescheduling would facilitate access to federal banking systems and allow for interstate commerce. It would also attract significant investment from institutional investors who have been cautious due to the Schedule I status. It is expected that this influx of capital would dramatically increase market size as businesses scale operations and access institutional investors.

3. Tax Revenue: Legalization or rescheduling could streamline tax structures and allow cannabis businesses to access standard business deductions. This would enhance profitability and could lead to increased tax revenue for federal and state governments, as seen in states that have legalized cannabis.

4. Research and Development: With legalization or a less restrictive classification, research into the medical benefits of cannabis would likely accelerate, leading to innovations in products and potentially new therapeutic applications. This could create new market segments and improve consumer confidence, which would attract more consumers and further stimulate market growth.

5. Market Expansion: Legalization or a Schedule III classification would enable cannabis products to be marketed more freely and allow more pharmacies to dispense medical cannabis. This could broaden the consumer base, increase accessibility and promote responsible use.

6. Potential Job Creation: The cannabis industry has already proven to be a significant job creator, and legalization or rescheduling is expected to amplify this effect. A more robust industry would necessitate a diverse workforce across cultivation, manufacturing, distribution, and retail sectors. Estimates suggest that hundreds of thousands of jobs could be created, further stimulating local economies.

Impact on Canada's Cannabis Industry

Economic Implications

If the United States were to legalize or reschedule cannabis to Schedule III, Canada’s cannabis industry could see both challenges and opportunities. Given Canada’s head start in federal legalization, U.S. companies might seek to compete in the international market, particularly in cannabis exports. However, increased competition could also lead to innovations in product offerings and market strategies among Canadian producers. It is expected that such cannabis reform will create:

1. Increased Exports: Canadian companies could ramp up exports to the U.S. market, taking advantage of established brands and supply chains. This could bolster Canada’s economy, generating significant revenue from cross-border trade.

2. Investment Opportunities: With U.S. markets opening up, Canadian cannabis companies may find themselves in a stronger position to attract U.S. investors. This could lead to an increase in market capitalization and further economic growth within Canada. It would also likely lead to a migration of several public cannabis companies with operations in the U.S. that are presently listed on the Canadian Securities Exchange to move to the Toronto Stock Exchange, which is a more established stock exchange that attracts a greater number of investors.

Stock Market Dynamics

The Canadian cannabis sector is already publicly traded, and a shift in U.S. federal policy could influence stock valuations. Canadian public cannabis companies could see their stocks rise in anticipation of new market opportunities. In fact, each time there is a major announcement regarding cannabis reform, there has been a correlated jump in the stock prices of publicly traded cannabis companies across most major indices. It is expected that these dynamics will lead to:

1. Market Valuation: Canadian cannabis stocks could experience a surge as investors react to the potential for U.S. market entry. This would increase overall market confidence and liquidity in the sector.

2. Mergers and Acquisitions: Canadian firms may become targets for acquisitions by U.S. companies looking to establish a foothold in the Canadian market. This could lead to a wave of consolidation, driving further growth and innovation. In addition, there are a number of publicly traded well known Canadian cannabis companies that have entered into agreements with U.S. cannabis participants to acquire majority stakes in their operations as soon as cannabis is no longer federally illegal. Accordingly, it is expected that U.S. federal cannabis reform will lead to significant acquisitions that would be expected to cause the acquiror’s stock prices to surge.

Job Creation

As the U.S. market expands, Canadian cannabis companies may need to scale up operations, which would lead to increased job creation. This could include roles in cultivation, production, sales and distribution. It is also expected to create opportunities for:

1. Cross-Border Employment Opportunities: Canadian companies may also explore cross-border employment arrangements, tapping into the expanding U.S. market while creating jobs in both countries.

2. Research and Development Jobs: With an increased focus on innovation, R&D positions could proliferate, benefiting both the Canadian and U.S. markets.

Conclusion

The momentum for cannabis reform in the United States is stronger than ever, driven by legal, medical and social factors. The potential to legalize or reschedule cannabis from Schedule I to Schedule III is poised to create significant economic opportunities in both countries, spurring investment, job creation, and substantial tax revenue, while also promoting research and innovation. As market sizes are projected to expand dramatically, the case for federal reform becomes increasingly compelling. With public opinion shifting in favour of reform and state laws becoming more progressive, the pressure for change is mounting. Notably, for the first time in history, both presidential candidates have committed to advancing meaningful cannabis reform if elected. So, regardless of who becomes the next United States President on November 5, 2024, the path forward is bright, requiring collaborative efforts from lawmakers, advocates and researchers to navigate the evolving landscape of cannabis policy. This is a crucial moment for advancing practical and beneficial cannabis legislative reform.

For more information, please contact Andrew J. Wilder or any member of Torkin Manes’ Cannabis Law Group.