At the beginning of 2020, California’s legal-pot industry, struggling to stabilize itself amid a sea of confusion and often-onerous regulations, high taxes, a burgeoning black market and numerous business failures, had high hopes that the state government would step in to ease some of its burdens.

Then Covid struck, and everything was put on hold as the state focused most of its attention on managing the pandemic and dealing with wildfires. Luckily, state and local governments declared cannabis to be an essential business, or the year could have turned out to be catastrophic. The problems still existed, but were eased somewhat thanks to increased sales. With the industry still struggling and the economy opening back up, all the hopes of early 2020 have been renewed for this year.

Some progress has been made. One of the industry’s biggest problems is that the vast majority of legal pot companies have provisional licenses that are set to expire next year. Absent any action by the state government, that will put many of them out of business. Luckily for the industry, the legislature last week approved a bill to extend those provisional licenses until 2025. Gov. Gavin Newsom is expected to sign the measure into law.

But problems remain. In a letter to legislative leaders, the California Cannabis Industry Association declared it could not support the bill, because it makes no provisions for cannabis operations in several counties that have their own regulatory schemes and licensing requirements. The CCIA specifically cited Calaveras, Mendocino, Sonoma, Trinity and Yolo counties.

According to the governor’s office, about 8,600 cannabis businesses, representing more than 80% of the state’s legal pot industry, operate on provisional licenses rather than permanent, renewable ones. Those businesses thus have uncertain futures, and the situation makes it that much more difficult for them to attract already-scarce capital. Provisional licenses are granted to businesses that haven’t yet completed environmental-impact statements under the state’s strict California Environmental Quality Act. In June, the state legislature approved Newsom’s budget proposal to give $100 million in grants to local governments to enable them to help cannabis businesses come into compliance with the CEQA, and get their permanent licenses.

But that won’t help companies that won’t be in compliance by the 2022 deadline. The bill to extend the deadline for much of the state until 2025 “fails to acknowledge a variety of common methods utilized by lead agencies to comply with CEQA when issuing permits and licenses for commercial cannabis activities,” the CCIA complained in its letter. “Furthermore, this bill imposes unachievable and unrealistic timelines on local jurisdictions faced with processing high volumes of cannabis permits, which risks putting thousands of existing, provisionally licensed cannabis operators out of compliance with state law, and making them ineligible for provisional license renewal.”

The issue is likely to be taken back up when the legislature reconvenes in August. The CCIA and its allies say they are optimistic that the issues will be addressed then. 

Even if the bill is reworked, however, meeting CEQA’s requirements will still be an onerous and expensive challenge for many cannabis companies and growers, especially smaller ones. Given the high taxes, tight regulations and slim profit margins the industry faces, some companies won’t be able to come into compliance. And all of these challenges tend to dissuade entrepreneurs and financiers from entering the business in the first place.

Not that it’s an easy problem. Unregulated, the weed industry can be remarkably damaging to the environment—sucking up scarce water and spraying nasty pesticides all over the place, for example. For this reason, environmental groups such as the Sierra Club have lobbied against extending the provisional licenses.

But the situation presents the same quandary as the state’s high tax burden does: it discourages the legal pot trade, which in turn encourages the black market to keep operating. And black-market pot growers are much less likely to care about the environment than legal growers are.