Peter Wilson: The election referendum question is legal or illegal cannabis supply

New Zealand has high consumption levels of cannabis compared with other parts of the world. Photo / Bevan Conley

COMMENT:

The choice in the referendum on cannabis is not really about whether people will or will not consume the drug. Consumption is already prevalent in New Zealand and is high by international standards.

Recent legislation has already reduced the legal consequences to individuals of their consumption (through changes to the procedures for prosecution for possession of cannabis generally and in how people who use cannabis as a palliative are to be handled).

Rather, the choice is really between legal and illegal supply.

Based on overseas experience, making supply legal can have a number of effects.

The first is that the pre-tax retail price of cannabis can fall. One reason is that current illegal suppliers might be able to charge a premium for undertaking a risky activity, although we don't have any evidence of the extent of this in New Zealand.

Economists call this an "economic rent". Another reason is that current illegal production methods are often costly (small plantations in isolated areas; high-energy hothouse production; labour-intensive distribution channels). Legal production can use more efficient growing techniques (such as large-scale outdoor farming) and locate production closer to centres of consumption. People will also be able to grow their own cannabis legally.

Whether the price consumers pay for their product increases or falls will also depend on the level of taxes imposed. The New Zealand proposal is to apply an as yet unspecified excise tax, plus GST, on legally supplied cannabis (like the current taxes on alcohol and tobacco). The draft bill published by the Government provides that the excise should be set to ensure that the price of cannabis remains at a level consistent with the purpose of the legislation, which is to reduce harm.

Illegal suppliers could therefore have a price advantage if their production costs are not too high.

The second effect of legalisation, and perhaps counter-intuitively, is a reduction in supply to underage users. Currently, sale of cannabis is illegal regardless of the age of the customer. With legal supply, sale to adults will be permitted, but regulated, while supply to those under 20 is not.

The economic sanctions proposed for under-age supply (imprisonment, fines and loss of licence to supply) have overseas seen legal suppliers take greater actions to prevent underage supply than illegal dealers and this is reflected in consumption data.

A third effect of making supply legal is that it allows regulation, especially on product safety. Under the proposed New Zealand scheme, all cannabis products will have to be tested before sale and the concentration of the main psychoactive substance in cannabis, THC, must be shown on the label.

The draft legislation allows the legal sale of edible cannabis and cannabis-infused products, not just the dried plant itself, which may induce new consumers to the market.

Whether legal distribution of cannabis wipes out the illegal trade depends on legislation, regulation and the level of taxation. Photo / Jason Oxenham

The consumer will also be able to have recourse to consumer protection legislation, like the Fair Trading Act, if they are dissatisfied with the product or service they receive. This avenue for redress is not available with illegal suppliers.

What will happen to overall levels of consumption after legalisation, especially after any novelty effect wears off, is unclear. Overseas experience is that few people are currently put off using cannabis by its prohibition.

Any increase in consumption will be driven by the number of people who currently might like to consume cannabis but are unwilling or unable to find an illegal supplier of the sort of product they want to consume.

There is no guarantee that legal supply will drive out the illegal market. Much depends on the details of legislation, regulation and the level of taxation.

Some American states, with reasonably liberal regulatory regimes, have seen the illegal market largely disappear. Canada, despite a policy of driving out illegal supply, has been less successful, in part because of the reluctance of some provincial governments to grant sufficient licences to satisfy existing demand. Uruguay, which introduced a very controlled legalisation regime has had limited success at stopping illegal suppliers.

Peter Wilson. Photo / Supplied

One of the purposes of legalising cannabis in the draft legislation to be put to the referendum is to progressively reduce consumption through time. This will be achieved by education, taxation and progressively limiting the amount of cannabis products that can be sold. Achieving this aim without simply pushing people back to the illicit market will require a fine balance.

And finally, the big question in moving to legal supply is that, in the move away from criminalising people and treating this as a health issue for people with underlying mental health and substance abuse issues, will there be services in place?

We have yet to see the promised services put in place following the Ron Paterson-led Mental Health Review. On top of Covid, we have probable future changes to the structure of the health services. It is on this point of adequate prevention, education and treatment services that we need reassurance for the policy to be cohesive.

• Peter Wilson is the principal economist with the New Zealand Institute of Economic Research.