Could This California Environmental Law Be the Cannabis Industry's 'Silent Killer'?

The California Environmental Quality Act is empowering anti-cannabis NIMBYs and causing regulatory chaos


Given how often California's regulatory state ensnares mundane things like plastic straws and apartment buildings, it should come as no surprise that the state's now-legal recreational cannabis industry is having a hell of a time navigating a new world of red tape and restrictions. Causing particular grief is one of the Golden State's more infamous laws: the California Environmental Quality Act (CEQA).

Passed in 1970 and signed into law by famed anti-pot scold and then-Gov. Ronald Reagan, CEQA has developed a reputation as the NIMBY's weapon of choice for killing off disfavored developments. The law is now being used to frustrate cannabis entrepreneurs who are trying to go legit.

"I like to call [CEQA] the silent killer," says Pamela Epstein, an environmental lawyer and founder of the cannabis consultancy firm Green Wise.  Other cannabis consultants have said the law could cause an "extinction event" for the cannabis industry.

Understanding how one law can be so problematic requires understanding a bit about how CEQA works.

In brief, CEQA says that any project with the potential to change the physical environment of the state and which will undergo discretionary review by a government body must submit extensive studies to assess potential environmental impacts that might need to be mitigated.

As written, the law requires just about every construction project in California to undergo some sort of environmental review. Crucially for the cannabis industry, this requirement also applies to local zoning ordinances that dictate where new developments can build.

Joanna Andreasson
(Joanna Andreasson)

The law also gives third parties who feel a particular project or ordinance has received insufficient environmental review the ability to appeal. Should that appeal be rejected, these third parties can use the law to sue.

Given the huge of number of things that count as a project under CEQA, the long list of environmental impacts the law requires to be examined, and the low cost of filing an appeal, the law is often used as a weapon to delay or stop disfavored projects (a few of which Reason has profiled).

In the case of cannabis, CEQA has already sparked a number of lawsuits from anti-cannabis groups alleging that local governments performed inadequate environmental study before approving their own cannabis regulations.

In January of this year, Trinity County—part of the famed 'Emerald Triangle', so-named for its legendary cannabis grows—was sued by a local NIMBY group arguing the county's ordinance governing marijuana cultivators lacked sufficient environmental review. The year before, San Mateo County, just south of San Francisco, was hit with a similar lawsuit.

San Mateo County buckled quickly, agreeing to a moratorium on the issuance of new cannabis licenses. Trinity County is being a bit more heroic, deciding to fight its own anti-cannabis lawsuit in court.

Individual businesses have been tied up by these lawsuits as well, says Epstein. "I have a client going through this right now," she tells Reason. "They did traffic impact analysis, they got an air quality engineer, and still the NIMBYs decided to sue because they knew better, and didn't want this dispensary there."

To its credit, the California Legislature tried to head off a lot of these problems by passing an omnibus cannabis bill in 2017 that, among other things, gave local governments the power to exempt their own cannabis ordinances from CEQA.

In theory, this was supposed to make it easier for local governments to quickly set up regulatory regimes for the newly legal cannabis industry while avoiding the onerous environmental study requirements of CEQA.

In practice, it's made things worse for a lot of cannabis businesses.

That 2017 state law said that even if a local government did exempt its own cannabis regulations from CEQA, it still had to require each individual business to go through the CEQA process when they apply for a local permit.

Unfortunately, a lot of localities shirked this requirement, instead just approving cannabis permit applications without subjecting them to any sort of CEQA review. That, in turn, has caused problems for these businesses as they apply for permits at the state level, where CEQA is sacrosanct.

Beginning in late 2018, state regulators started issuing permanent licenses for cannabis operations, which are supposed to replace the temporary licenses these businesses received as a stopgap measure. About 10,000 of those temporary permits are supposed to expire this year.

The trouble is that in order to get a permanent state license, a business has to show compliance with CEQA—something that wasn't required to get a temporary state license or by some local regulators. In short, these folks were likely under the impression that everything they did to get their business open would be enough to keep it open.

Instead, many businesses using temporary licenses have applied for a permanent state license only to be told that they still need to go through a possibly-year long CEQA process (longer still if some NIMBY decides to sue) before they can be approved, during which time their temporary license will likely expire. Without some kind of valid state license, cannabis operators will have to shut down.

In 2018, the state legislature tried to fix this problem, too, by allowing state agencies to issue provisional licenses to anyone that could show they were in the process of coming into compliance with CEQA. The idea was to use these provisional licenses as a bridge for operators whose temporary licenses will expire soon, but who still have a lot of work to do before they can qualify for a permanent license.

And indeed, these provisionals have proven a lifeline for a lot of businesses that were out of compliance with CEQA. However, they've done nothing to help those businesses who were forced to go through the CEQA process at the local level.

Because those businesses are already CEQA-compliant, they're ineligible for provisional licenses. They also can't get a permanent license because there is a huge backlog of permanent license applications at the state level.

To give you a scale of the problem, the California Department of Food and Agriculture (CFDA)—which is responsible for licensing cultivators—has issued a total of 96 permanent cultivation licenses, according to the department's online database, and another 695 provisional licenses since late 2018. Yet on April 20 of this year alone—when stoners across the state will be lighting up—some 1,200 temporary cultivation licenses are set to expire.

"We have several hundred, if not thousands, who are not eligible for provisional [licenses] because they can show CEQA compliance," says Epstein. Many of those businesses will be forced to shut down once their temporary licenses expire. "It's like they want you to be compliant but compliance is the thing that is hamstringing some of these operators."

Industry consultants say a scenario in which all these businesses end up in legal limbo would be an "extinction event" for cannabis businesses.

To make matters worse, Epstein speculates that state regulators are prioritizing provisional license applications because they only require a showing that a cannabis operation is trying to bring itself into CEQA compliance; it's more time and resource-intensive to verify that a business is actually fully compliant.

Currently, there's a bill pending in the legislature that would allow for temporary licenses to be extended while state regulators get to work processing applications, but it has yet to pass. Even if it does, its own sponsor describes it as a "band-aid" intended only to give state agencies a little breathing room.

If all of this sounds like a huge, confusing mess to you, that's because it is. California is proving an extreme example of a problem bedeviling all states that have legalized recreational marijuana: how to quickly transform a loosely or mostly unregulated black market into a heavily regulated legal market one in a very short period of time.

This process has been made all the worse by California's environmental review law, which has empowered recalcitrant anti-cannabis NIMBYs to bog down local regulations in litigation, and is causing bureaucratic gridlock at the state level.