GREEN ENERGY HEADING TO RED STATES

 When you’re green you’re growing; when your ripe, you’re not. ~ Ray Kroc 

Unexpectedly, the winds of green energy are blowing towards red territories. It’s still in the early rounds of states racing to claim the gigantic amounts of federal funds available for greening the energy we use on a daily basis. Nevertheless, politically red states are doing unexpectedly well in the nascent green energy sweepstakes. The Rocky Mountain Institute thinks that red states will get $623 billion (B) in total clean energy investments by 2030, compared with $354B for blue states.

The misnamed Inflation Reduction Act (IRA) that President Biden signed into law in last August will be providing $367,000,000,000 for loans and subsidies to upgrade or replace the nation’s energy infrastructure, improve energy technology and promote electric vehicles (EVs). Even in Washington, DC this $367 billion (B) is not chump change. The IRA is offering the largest opportunities for climate enhancement and green energy in the nation’s history. Such fiscal largesse is even changing policy makers minds in red states. Hopefully these abundant funds will not go to chumps; we’ll see.

Red states are now receiving significant federal funding for renewables. The table below shows much larger solar and wind electricity generation in Republican-controlled red states like Texas, Iowa and Oklahoma than in blue California. The sun shines nearly everywhere on our worthy planet, but where winds are constantly blowing is more circumscribed. This is due in large part because Aeolus, the Greek ruler of the winds, provides the most favorable wind conditions for producing electricity – winds steadily blowing between 10 to 50 mph – in the Great Plains states from Texas to North Dakota. This fact is illustrated by 4 of the 5 top renewable energy producing states shown in the table below are predominantly wind-driven. Texas produces 85% of its renewable electricity from wind; 3 of them – Iowa, Oklahoma and Kansas produce renewable energy only from the wind. California has substantial wind farms, including the nation’s largest, but just 34% of its renewable energy comes from wind. Two-thirds of its green energy comes from solar PV panels on urban rooftops and more remote solar farms.

Top 5 Solar and Wind Electricity Producing States and their Political Control  

State & Rank	2022 Solar +Wind Generation (MWhr)	Gov-ernor Party	Legis-lature Party	Overall Control
1.Texas	136,118 (85%)*	Repub (R)	R	R
2.California	52,927    (34%)	Dem (D)	D	D
3.Iowa	46,058  (100%)	R	R	R
4.Oklahoma	37,500  (100%)	R	R	R
5.Kansas	29,536 (100%)	D	R	Mixed
Total	302,139	3-R;    2-D	4-R;   1-D	3-R; 1-D; 1-Mixed

  *Indicates percent of Total renewable energy from wind generation. Sources: DOE/EIA, Multistate chart of governors and legislatures.

Red states like Texas are ironically doing quite well generating green energy, despite their on-going solid preference for good ol’ fossil fuel produced electricity. Certifiably blue states like California have not yet overcome existing rules and regulations that can hinder swift implementation of “getting to green” policies, like constructing new transmission lines to serve newly-built, remote solar and wind facilities.

Adding to California’s green energy paradox is the California Public Utility Commission’s (CPUC’s) December ruling that drastically cut payments (up to 80%) to new rooftop solar customers who sell their excess solar energy to the grid. The CPUC mistakenly rationalized its anti-solar decision solely on equity grounds, not California’s green energy policy goals. Lower-income residential electricity customers have not participated nearly as much in rooftop solar installations as higher-income customers have. Thus, the CPUC judged that heretofore inequitable solar payments will be reduced for the latest solar customers, to diminish the inequality. By design, this decision de-incentivizes solar rooftop installations. Apparently the CPUC did not get Governor Gavin Newsom’s memo about the state’s solar-reliant energy goals.

These tribulations in California illustrate that progressive liberalism may lead to seriously-stymied construction of much-needed new facilities, whether it’s new housing, solar rooftops/farms or infrastructure. This frustration is echoed by the governor when he stated, “’People are losing trust and confidence in our ability to build big things. People look at me all the time and ask, ‘What the hell happened to the California of the ’50s and ’60s’” when we got things built? This issue is squarely allied with governor’s vexation about his new prioritizations to add evermore solar and wind farms and mandating that car dealers sell only non-fossil, non-polluting new EV or PHEV vehicles by 2035.  By then California will need at least 1.2 million EV charging stations; it currently has 73,000.

Clearly, this is an aggressive mandate. My sense is the 2035 terminal date for selling any new internal combustion engine (ICE) vehicles will slip, because the state of California cannot force customers to buy zero-emission vehicles (ZEVs), many of whom inconveniently for the California Air Resources Board (CARB) won’t likely buy a new or used EV just because the state mandates and offers incentives for it.

The governor has forgotten the multiple postponements that were required for the CARB’s previous and premature ZEV mandates that CA vehicle dealers were to sell more ZEVs that represented the CARB-mandated percentage of total vehicle sales. The CARB grudgingly eliminated its 1998 and 2001 ZEV mandates, keeping only the requirement that 10% of all vehicles sold in California have zero emissions by 2003. Why the elimination? Because most vehicle buyers had other priorities than purchasing an expensive EV to satisfy the CARB. California ZEV annual new auto sales finally reached 10% 17 years later, in 2020. EVs now represent 2.7% of all registered vehicles in California.

The governor’s aggressive goals will require electricity transmission line additions to be built in a timely manner, not just new green energy facilities. Pictured below are high-voltage transmission lines that are part of the Pacific Intertie system. The Intertie has been the state’s electron throughway since 1970. It is the longest electricity transmission system in the US, crossing 850 miles from far northern Oregon to Los Angeles. During the coming years, the Pacific Intertie will be shipping more electricity, largely from renewable sources in new California locations and beyond.

 

The 500 kV Sylmar Converter Station on the Pacific Intertie

 No small contributor to this growth is Gov. Newsom’s green energy policy goal: by 2045 California will be carbon neutral and running its electricity grid, operated by the California Independent System Operator, on 100% renewable energy. This date may seem distant, but not after realizing that meeting this goal will require quadrupling quickly the amount of green electricity generation. In 2021, renewable power accounted for 34.8% of California’s electricity generation. Attaining 100% renewable power in just 22 years will not happen unless regulatory process gets modified. Such changes will be resisted and require trade-offs to be made by regulators, environmentalists and regular citizens. There’s been little public discussion, let alone agreement about how to counter this resistance and make such trade-offs to achieve policy deadlines. Its resolution will require time-consuming deep thought and administrative lingering. Furthermore, these public goals speak nothing about the various behavioral changes we Californians will need to accept in getting to 100% green energy.

Other changes that began during the Covid pandemic are continuing to wallop the SF Bay Area area’s public transit systems especially BART, the commuter rail system in the East Bay and the City. In 2020 the federal government provided almost $10B in temporary “operational relief to stabilize California’s transit agencies” as the pandemic hit. Many of these agencies, like BART, are now exhausting this extraordinary relief funding at the same time as ridership has plummeted below pre-pandemic levels. Public transit is facing an acute “fiscal cliff.”

BART’s commuting patterns and ridership have profoundly changed. Ridership has sunk to only 37% of what it was before Covid, probably the worst drop in the nation (see image below). At the same time, BART customer complaints regarding personal safety and cleanliness have dramatically risen.

 

A recent BART rush hour that’s not at all rushy. Source: NYTimes

 In the best of times BART’s passenger fares only provide 60% of the system’s costs. It’s currently nowhere near the best of times. The system’s public subsidy has been estimated to be over $6 per person-trip before ridership collapsed. California will likely provide a needed $1.1B bailout for customer-poor, fiscally-decrepit BART, only about half of what it requested. BART has already begun increasing fares and fees for its riders. Also likely are new requests for higher Bay Area sales taxes aimed at avoiding transit’s fiscal cliff. Train and bus services will surely be reduced to save costs. Such cliff-avoidance procedures in turn will further diminish transit ridership.

Prohibiting ICE sales by 2035, achieving carbon neutrality by 2045 as well as returning BART and other transit agencies to stable, long-term existence ASAP seem positively utopian to me. Mind you, I have nothing against utopias, beginning with Thomas More’s that I read in high school. But as literary worlds, they’re far more interesting than any of the real-world ones that never succeeded,

Maybe the ambitiously bold policy deadlines mentioned above aren’t really fixed, they're only innuendoes. It’s an unfortunate mystery that no one apparently really knows how these diverse, consequential goals will be threaded through our blue state’s arduous permitting, site licensing and fiscal regulatory processes to meet these aspirational deadlines. Here's hoping. 

 

GREENERY, ROBOTS and TAXES

That is not a drug; it’s a leaf. ~ Arnold Schwarzenegger 

Aside from offering a slight helping of food for thought, is my first vegan blog. I’ll verbally taste a plateful of two quite dissimilar and sometimes organic green plants that made the news recently. The first one I’ll examine, asparagus, is fairly distinctive but lacks public awareness. It remains an enduring but minor contributor to our overall agricultural output. The second green plant, marijuana, has a polemic history and far more community standing.

Asparagus is also called sparrow grass. Humans have cultivated it for several millennia. Its origins are shrouded in the mists of horticultural history, but include temperate, often maritime climes in most of Europe and western Asia. Some agronomists believe an Egyptian hieroglyph from 3000 BCE shows asparagus being grown. Ancient Greeks ate wild asparagus’ tender shoots. In the West it was the Romans who first began farming asparagus more than 2000 years ago. Cultivators spread this triffid throughout their empire. The Sun King, Louis XIV was a big fan, calling asparagus the king of all vegetables. He had several greenhouses built so he could eat it throughout the year.

Asparagus has been cultivated in America since the late 17th century. Hoping to entice travelers to move to his part of the new world, William Penn advertised that asparagus grew well in Pennsylvania’s climate.

Growing up in Philadelphia, my parents apparently were not enticed by Penn’s ancient advert. They did not ever grow any asparagus in their gardens. But I do remember eating spring asparagus shoots, shown below, on a semi-regular basis at dinnertime. Yum.

 

Young asparagus shoots doing their version of the hula.

I also remember one of asparagus’ signature post-consumption effects, my urine smelled strange. Asparagus contains aptly-named asparagusic acid which during digestion produces sulfur compounds in one’s intestinal tract. Hence the pungent smell. Benjamin Franklin, among many others, characterized this odor as “disagreeable.”

Only four (4) states account for the entire US asparagus production. It is a very minor crop in America, just 37,200 tons most recently, which accounts for a trifling 0.09% of all US vegetables produced. In contrast, China grows about 900 thousand tons of asparagus every year.

Unlike many other veges, California isn’t the largest producer of asparagus. Michigan produces 40% of the total crop, followed by Washington, then California and finally New Jersey. However, asparagus’ growing season in California is the longest of any state, from January (in far southern valleys) through mid-June (on the central coast).

Because of dire shortages of agricultural workers in the US, growers are eagerly hoping that viable, robotic harvesting machines can take up the slack. As the supply of seasonal agricultural labor has withered, crops have been plowed under. The reduced farm worker supply has been caused by multiple reasons. One of which is that exclusions for using temporary, nonimmigrant H-2A workers principally from Mexico have increased. In 2019 there were 442,000 H-2A admissions; in 2021, just 258,000.

First attempts at automating crop harvesting began in the 1950s and 1960s. Abundant challenges have slowed expected progress in making autonomous, robotic harvesters for commercial produce like almonds, apples, grapes, oranges, strawberries and tomatoes. For these crops, robotic harvesting still remains on thin ground.

 

The Sprout asparagus harvester

But asparagus’ distinctive and unusual physical shape may make it a shoe-in for fully-automated harvesting, hence its recent newsworthiness. Asparagus consists of a single stalk without any confusing foliage that can styme robotic harvesters. A single plant can produce up to 20 stalks during its 2-month growing season. It is also fast growing – up to 0.8 inches in an hour – so the robot can return in a couple of days in peak season for another go at the same field, rather than wait for a reappearance next season. One prototype robotic harvester, shown above, is the Sprout, made specifically for asparagus. It’s been successfully tested at several locations in the UK. More US farmers continue to face conditions that lead to giving up and leaving their fields behind. Could the Sprout help asparagus growers provide a more sustainable supply? Let’s hope so.

The second green plant under consideration is marijuana. For at least 2500 years it has been grown for its psychoactive effects. Originally native to Central and South Asia, its use spans recreational, medicinal and spiritual purposes. It is the most commonly used illegal drug in the world, including America.

No matter whether you call it cannabis, kush, bud, herb, dope, reefer, tea, ganja, grass, weed, head, mary jane, doobie, hash, bhang or, if you must, pot, it has a far higher public profile than asparagus. Currently, 19 states have legalized the sale of recreational and medicinal marijuana; 21 states allow only medicinal marijuana to be sold. Eleven hold-out states, you know who you are, do not allow marijuana of any sort to be legally sold or grown.

California voters approved Proposition 64 in 2016 that legalized recreational cannabis; its medicinal use was permitted 2 decades earlier. Legal recreational cannabis sales began in 2018.

 

 This bud’s perhaps for you.

     Prop 64 was heralded at the time as a fine way to shrink the state’s large, illicit, black market weed, and give people harmed by the war on drugs and other historical events a chance to join the licit economy. They could become cannabis growers or distributors. However, local and state politicians soon dismissed any real interest in reducing black market “street” weed when they imposed significant, multi-jurisdiction taxes on legal cannabis.

California’s system of reeferegulation that attempts to control the cultivation, processing and sale of cannabis is exceedingly byzantine and ultimately based on politicians’ fiscal greed. California’s taxes on cannabis may mount to 50% of the retail price for consumers, which can make legal weed a harder sell on the street against some of the world’s best (and illegal) kush from the Emerald Triangle.

A recent guestimate of the total size of California’s cannabis market states that the legal market is merely 35% as large as the black market. Doesn’t sound like California’s legalization has crushed the mature, well-established unlawful market, does it.

The legal framework established by Prop 64, together with California’s flawed implementation, have contributed to continuing problems for legal producers and distributors. One predominant reason for such problems is centered on Prop 64’s requirement that local governments must opt in to allow recreational sales to adults. Sizeable portions of California officialdom have prohibited recreational cannabis sales; 67% of the state’s jurisdictions still block sales.

At last count, there are only 866 licensed cannabis dispensaries in the state or 1.6 per 100,000 residents. This low number puts California far behind other states in terms of dispensaries per capita, one-tenth as many as Oregon. When and where there are no legal dispensaries, black market cannabis rules at far lower prices.

Experts believe the street price of an ounce of weed is 50% lower than the taxed, legal weed. No wonder growers are unhappy, although they’ve known since the very beginning of California’s legalized cannabis that their products cannot compete purely on price with street weed.

But cannabis spot-prices have steadily dropped over the past 3 years and more so in 2022, in part because legal production had increased. Over just the past 2 months, national spot-prices fell 17%. In California, statements of a legal weed “glut” are commonplace.

Nevertheless, legal weed has found a valuable niche in California’s cannabis firmament. We’re not talking penny-ante change here. The state is now the largest legal cannabis market in the world, the biggest Kahuna, raking in $5.2 billion (B) of taxable sales in 2021, a 17.1% increase from 2020. Last year, $1.5B in cannabis-related tax revenues were provided to selected localities and the state. California politicians may be happy. But other actors in the legal market are not and have made their complaints clear in Sacramento.

Governor Newsom and the Legislature’s Democrat leaders finally reached a deal to restructure the state’s oppressive taxes on legal cannabis. He signed the legislation into law on June 30 that will eliminate the growers’ cultivation tax. In addition, the new law provides $150 million from the state’s seemingly huge budget surplus to recipients of this tax’s revenues over the next 3 years as a back-stop for the resulting tax revenue reductions.

Beyond growers, another key group of market participants are dispensary owners, including what’s known in liberal nomenclature as social equity operators (SEOs). SEOs are folks who have received their dispensary licenses through local programs, like in Oakland, San Francisco and LA, intended to diversify the industry with more people of color, formerly incarcerated people and residents of neighborhoods with historically disproportionate marijuana arrest rates. SEOs represent about 23% of all cannabis dispensaries in California.

SEOs have been vociferous in their displeasure with the tax restructuring legislation. After all, issues surrounding the numerous facets of equity have established a prominent place in the hearts and minds of true blue Californians, include legislators. The new law provides SEOs with a $10,000 tax credit and allows them to keep 20% of the excise tax revenue they collect for the next several years.

SEOs dismissed this benefit as “crumbs.” They wanted much more, including a complete elimination of the sizeable excise tax. They thought they would get it, given their cause and the cobalt blueness of much policy-making in Sacramento. They did not.

The retail price of California’s legal weed may be reduced a bit due to the new law, but wholesale cannabis prices have already rebounded from last year’s slump because of increased demand. Meanwhile the price of asparagus has dropped, due to decreased demand and increased supply. A plate of asparagus spears and a pre-roll thus offers mixed fiscal blessings, depending on your taste. What will it be?

 

 

 

A BUG AT THE BANK? SAY IT ISN’T SO

We don’t have the gold standard. It’s not because we don’t know about the gold standard, it’s because we do. ~ Allan Meltzer    

Gold has been used by humans as a symbol of value and prestige since antiquity. Its purest 24 carat form is a bright, reddish-yellow dense, soft metal. Gold occurs as nuggets in rocks, in underground veins and alluvial (loose sediment) deposits. So-called “gold bugs” – people who reverently believe gold is the ultimate standard of value – have occupied positions of societal power and influence for a very long time, but not recently. Gold bugs haven’t sat at the citadels of US public authority for almost 90 years; that may soon change if #45 gets his way. Oh my.

Consider first some golden history.

The seemingly eternal allure of gold obliged our ancestors to find it. People have mined gold for at least 7000 years in what’s now eastern Europe and the Caucasus, as well as China, India, Mesoamerica, Spain, Ireland and Wales. Because gold served as the primary medium of exchange within the Roman Empire, they developed and used ground-sluicing methods on a large scale to extract gold. Historians believe the Roman invasion of Britain in the first century AD was principally motivated to expand their supplies of this prized metal.

The first precious-metal coins were used as money in several places about the same time, around 600-500 BC; in the Yellow River valley in northern China, in the Ganges River valley of N.E. India and by the king of Lydia in western Asia Minor (modern Turkey). The Lydian coins, shown below, were made from electrum – an alloy of gold and silver. Officials stamped images on bean-sized lumps of electrum that helped guarantee the value of each coin, and discourage counterfeiting. If only.

Lydian coin

Following the lead of Lydia, most nations have employed gold specie to conduct commerce for centuries. During the Middle Ages, Byzantine gold coins were used throughout Europe and the Mediterranean. Twenty-two carat Spanish Doubloons were widely used in Europe and the Americas from the early 16th to mid-19th centuries. During its primacy, the Doubloon served as a multi-nation de facto gold standard, a monetary system in which the standard unit of currency is based on a fixed quantity of gold. The US formally adopted the gold standard in 1873, using its $10 gold eagle coin as the nation’s primary currency unit. The US mint produced gold coins of various denominations from 1872 through 1933. Like many other nations, our country effectively abandoned the gold standard in 1933 during the depths of the Great Depression. It finally and officially severed the link between the dollar and gold in 1971. The image below shows our “lady liberty” gold dollar coin first issued in 1849.

US Lady Liberty gold dollar coin

The late 1840s ring a very special chime in the golden history of the US.

The California Gold Rush began in January 1848 when James Marshall found a placer nugget in a river at Sutter’s Mill in the Sierra Nevada foothills almost 50 miles northeast of present-day Sacramento. Proclamations of his discovery created such a popular incentive for people also wanting to “strike it rich” that over 300,000 people soon headed for California from nearby and far-away places. They came from each of our then-30 states and every territory. They also arrived with the gleam of gold in their eyes from around the world, including the Sandwich Islands (aka Hawaii), China, Latin America and Europe. Because of gold’s draw, California rapidly became a state in 1850 without first being a territory, unlike any other western US region.

There turned out to be a lot of gold in the Sierra Nevada. By the end of 1848, the first year of the Gold Rush, $10 million in gold had been produced. The biggest nugget ever found was a bit larger than a shoebox and weighed nearly 200 pounds. By 1865, $785 million worth of gold had come out of the ground in California, probably making the difference in which side won our Civil War. This multi-million dollar mountain of gold represented 60% of the total US budget in 1865. It significantly contributed to keeping Union soldiers clothed, fed and paid, and bought much-needed guns, bullets and armaments. This massif of gold would be worth $12.9 billion in today’s dollars. Very, very little of this gargantuan sum stayed in miners’ pockets; merchants like Leland Stanford and Mark Hopkins became far richer. Notwithstanding putting California on the US map, the Gold Rush also decimated numerous indigenous Native American communities. Untold environmental damage accompanied the mining, especially the hydraulic variety that used 30,000 gallons of water each minute.

Where did all this lustrous California gold come from? Not from fairy dust. According to John McFee’s superb Assembling California that intertwines the state’s geological and human history, the Sierra’s deposits of gold were precipitated 150 million years ago when the third and last giant (10,000 square mile) island-arc fragment of the Pacific plate – the Smartville Block – accreted into the westernmost North American plate near where Auburn, California is now. The Smartville Block not only doubled the width of what is now California, but created its bountiful Mother Lode as well. California’s Mother Lode has produced more gold than any other state – more than 106 million ounces since 1848. In modern times about 38% of gold is used for jewelry; coins and official government uses, 22%; electrical and electronics, 34%; and other uses, 6%.

Now that we’ve scratched the surface of the history and source of most of the nation’s gold, let’s return to the present time and Judy Shelton, who adores gold.

Dr. Shelton has recently been nominated by #45 to fill a vacancy on the Federal Reserve Board of Governors. Although her nomination may not be as far-fetched as the president’s previous attempt to install the totally unqualified Herman Cain on the Board, she is quite controversial. She belongs to the justifiably much-endangered, very conservative tribe of modern-day gold bugs. Like her fellow bugs, she wants to reverse President Nixon’s decision to drop the gold standard and re-adopt it now. She has publicly praised #45’s tax cuts and deregulation policies. She approves of the president’s misguided trade war with China as a means of forcing it to “play by the rules.” As I’ve mentioned before, no one's won this war. So far the president’s tariffs have cost us taxpayers $28 billion. That’s what the Trump admiration has paid the farmers they wounded, with no end in sight. Nice call, Judy. 

Virtually all knowledgeable monetary economists believe returning to the gold standard would harm the economy and its citizens. The Federal Reserve’s principal means of influencing the macroeconomy is by increasing or decreasing the nation’s money supply depending on expected economic conditions. It increases the money supply if a recession is expected, thus reducing interest rates to spur loans and investment. The Fed decreases the money supply causing interest rates to rise, towards the end an expansion, if higher inflation is expected.

Monetary policy is hardly an exact science, but it would be significantly constrained under a gold standard. Why; because our money supply would essentially be determined by how much gold is produced.

Dr. Shelton has stated, “we make America great again by making America’s money great again” through returning to the gold standard. That’s patently absurd. Dean Baker, a macroeconomist who was one of the first to identify the 2007–2008 US housing bubble that lead to the Great Recession, likened returning to the gold standard as prescribing chemotherapy for someone who doesn't have cancer. An apt diagnosis Dr. Baker.

Turning the economic clock back and re-adopting the gold standard, as Dr. Shelton and Mr. Trump have fantasized, would link the money supply to gold production. If they actually thought through this fundamental relationship imposed by the gold standard, they would not at all be pleased. I don’t believe they’ve thought about it at all; it’s simply a sporadic gesture memorializing the unfamiliar “golden days” of the past. It would not please #45 one single golden leaf to learn that China is the world’s largest gold producer. 

Since the end of the last recession, US gold production has increased a meager 0.87% per year. This is why many economists believe that a re-imposed gold standard would act as a limit on economic growth. As an economy's productive capacity grows, then so should its money supply. But because a gold standard requires that money be backed by the metal, the scarcity of gold constrains the ability of the economy to produce more capital and grow. Thus a gold-standard based monetary policy could no longer be used to stabilize or grow the economy.

It’s likely that the Senate, under the imprudent leadership of Mitch McConnell, will confirm Judy Shelton. A single gold bug will then sit on the seven-member Federal Reserve Board. Her practical and institutional influence will be limited. But that’s one too many bugs at our central bank for anyone who wants an independent Fed to be a viable economic counterforce to #45’s feckless thrusts. Where’s the political Terminix when we need it?

THE HIGH PRICE OF GETTING HIGH

Let me get to the point / Let's roll another joint / Turn the radio loud / I'm too alone to be proud. ~ Tom Petty 

State marijuana markets are becoming white as well as black. More states are passing laws or propositions that legalize recreational and/or medical marijuana; creating legal white, regulated markets. Currently, 29 states and the District of Columbia have laws broadly legalizing marijuana in some form.

Despite characterizations by advocates, there is no national market for marijuana because of strict federal rules and regulations from the Justice Department’s Drug Enforcement Administration (DEA). According to federal statute, no marijuana (not even a single preroll) can be legally transported across state lines. All markets for medical or recreational marijuana are thus legally confined to individual states. Each state has its own rules and regulations for cultivation, production, sale and use of marijuana.

The Department of Justice Secretary Jeffrey Beauregard Sessions has clearly expressed his distaste for marijuana of any sort. As Alabama Attorney General he strongly supported an Alabama law that would have established mandatory death sentences for a second drug trafficking conviction, including for dealing marijuana. It was never enacted. Other cannibas-related statements by Mr. Sessions include: “Good people don't smoke marijuana;” marijuana reform is a "very real danger;" and it is “not the kind of thing that ought to be legalized.” I’d say Mr. Sessions is the kettle calling the pot black.  

According to federal statute, marijuana remains classified as a Schedule I drug, along with heroin and peyote. Schedule I drugs are those that have “no accepted medical purpose and a high potential for abuse” according to the DEA. Classifying marijuana as a Schedule 1 drug is a farce. If Mr. Sessions believes marijuana’s Schedule I designation is correct, then alcohol should be added to the list of Schedule I drugs, because its “high potential for abuse” is a matter of demonstrable knowledge (just ask one of the 2 million AA members). Oops, then he’d be battling the alcoholic beverage industry  that had sales totaling $223.2 billion in 2016. Not gonna happen. Like all too many of the president’s cabinet who play follow the leader, Mr. Sessions espouses his faith in inconsistent, misbegotten policies. States’ rights are fine and dandy when they “enhance” religious freedom or school choice, but nasty when they relax outmoded federal policy.

I believe marijuana/cannibas legalization for recreational and medical use is worthy and worthwhile. There are several useful objectives that can be met with legalization. The potential benefits from shelving prohibition and establishing publicly-regulated (white) marijuana markets – that The Economist terms “reeferegulation” – include: protecting consumers, promoting improved health, reducing penal sentencing of non-violent (mostly black) youth, saving the police money, raising tax revenues and putting criminal black markets out of business, as well as extending personal liberty. Beyond direct marijuana sales are benefits involving increased property values and more jobs (both in government and in marijuana production and distribution). Hey Mr. President, perhaps you should provide training and travel vouchers for former coal miners from WV and WY to head for states that have already legalized weed, where jobs are budding.

I highlight in this blog how stakeholders in legalized marijuana markets – producers/distributors, consumers and particularly state regulators – have affected its white market price.

Marijuana’s market price is a crucial factor and serves as a foundation for several available policy choices to achieve the above-cited benefits, especially dousing criminal black-markets and raising tax revenue. Despite the lengthy and expensive War on Drugs conducted by the DEA, the black-market supply of marijuana has never been acutely compromised. Curiously, pro-legalization advocates now echo the same benefits – lower criminal activity and increased tax revenue – that champions of Prohibition repeal proclaimed over 80 years ago with passage of the 21st  Amendment.

As mentioned above, legalized marijuana markets continue to expand across the US and beyond. This coming January, California expects to begin establishing the nation’s largest recreational marijuana market alongside those already operating in Colorado, Washington State, Oregon, Alaska and Nevada. In these states the legalized market for marijuana operates proximate to the traditional, illegal black market.

One of the important, repeatedly-mentioned goals of legalization is to eliminate black market marijuana supplied by criminal enterprises, a crucial goal that states need to achieve if they want to avoid federal intervention under the 2013 Cole Memo. It is a basic policy challenge for the regulated white market price to reflect this goal.

Public agency intervention with taxing and regulating white-market marijuana is a balancing act. This involves both interceding with the demand of legalized marijuana and its supply. Public authorities in each of the eight states now dealing with white market marijuana have confronted this challenge differently. If the tax rate is set too high, thus escalating the retail price, demand for white-market marijuana may be stunted. If growers and distributors believe that authorities have imposed too many or too stringent licensing and related regulations and not permitted sufficient numbers of retail dispensaries, then the supply of legalized marijuana may be inadequate. In either case, post-legalization customers can return (or remain) where they were before, in the underground black market. Also, if the price of the newly-legalized marijuana is much higher than the black market “street weed,” marijuana consumers may stay with their traditional sources rather than switch to the white market. If this happens, optimistically-forecast marijuana tax revenues won’t be collected, as happened in Washington State.

The growth of legalized medical and recreational marijuana sales has been impressive. In 1996, California became the first state to legalize medical marijuana when voters approved Proposition 215. Five years ago recreational marijuana wasn't legal anywhere in the US. Yet in 2016, sales of legal weed grew to $6.6 billion (B), according to New Frontier Data that includes $4.7B for sales of medicinal marijuana (in 29 states and Washington DC) and $1.9B for recreational weed (in Colorado, Washington, Oregon and Alaska).

The table below presents several facets of the 8 state recreational marijuana markets where it’s been legalized so far. The table lists states in chronological order of legalization. Cannibas shops that sell legal recreational marijuana and “edibles” have been open for business in Colorado and Washington since 2014, in Oregon since 2015, in Alaska since Oct. 2016 and in Nevada since July. The industry as a whole is projected to exceed $24B in sales by 2025, an annual growth rate of 16%. Despite its widening legality, if you show up for work and flunk a drug test due to marijuana use in these states, you still can be fired.

The State of State Recreational Marijuana Markets

State	When Legalized	First Month Sales ($M)	Aver. Mkt. Price* ($/oz.)	Sales Tax Rate
Colorado	2014	$15	$242	22%
Washington	2014	$3.8	$324	37%
Washington DC	2014	NY	$600	0%**
Oregon	2015	$15	$210	17%
Alaska	2016	$0.75	$298	$50/oz.
Nevada	2016	$27.1	$270	15%
California	2016	NY	$250	15%
Massachusetts	2016	NY	$340	3.75%
Maine	2016	NY	$297	10%

Sources: Priceofweed.com, The Cannabist, Tax Foundation. NY: Not Yet.

*Price of “high-quality” marijuana. **Federal law prohibits DC from taxing weed.

From the table, first-month sales of marijuana and related products have varied quite a bit for the 5 states where legal retailing has occurred. Nevada’s first-month revenues are the largest so far, by a wide margin. Because only Nevada-grown marijuana can be legally sold there, many dispensaries soon closed their doors after opening them. They had no product to sell because demand had far outstripped supply. After July, legal supply has become more available for the increased number of dispensaries.

The last column shows each state’s tax rate on marijuana as of January 2017. These rates can include either retail sales or excise taxes on marijuana, but don’t include wholesale taxes, optional local taxes or standard sales tax.

Washington DC’s rate, 0%, an obvious outlier, was set by Congress. After DC voters approved legalization in a 2014 an initiative, conservative members of Congress, who at times seem to work in DC, were upset, especially Rep. Andy Harris (R-MD). Medical marijuana has been available in DC for almost two decades. Rep. Harris did not want legal recreational marijuana on the streets around or beyond his Longworth Building office. Luckily for him, the House of Representative holds complete fiscal power over DC’s budget. Republicans have passed annual spending bills since 2015 that contain a rider written by Rep. Harris that prohibits the DC Council from using any appropriated funds for taxing or regulating marijuana. If you come to or live in Washington DC, anyone over 21 can legally possess up to 2 oz. of marijuana, but you cannot legally buy or sell it anywhere in the District. So it goes.

Beyond DC, state sales taxes vary considerably. Washington State’s marijuana tax remains the highest (37%), even though it was reduced in 2016. Massachusetts’ 3.75% is the lowest. States’ marijuana tax rates have tended to diminish after the first two states – Colorado and Washington – allowed legal sales.

Looking at Colorado and Washington illustrates the trade-offs and consequences arising from “more lenient” versus ”stricter” regulation. Colorado initially set its marijuana taxes fairly low, at 28%. It also took a somewhat lenient approach to licensing sellers, meaning there were many of them. In 2016 there were 698 storefronts in Colorado that sold medical or retail marijuana, more than triple the number of Starbucks in the state. Colorado has more than 2.5 times the marijuana dispensaries than Washington State initially had, after accounting for the population of each state.

First-month total revenue in Colorado was $15M, four times higher than Washington State’s. Perhaps not surprisingly, Colorado is now the most popular spring vacation destination for US college students; the Colorado Cannibas Chamber of Commerce (yes!) has done its job. Beyond spring, almost one-quarter of Colorado’s 77M yearly visitors, and one-third of those between 25-34 years, said that availability of recreational marijuana was a reason they chose to visit the state.

In 2015 Washington initially set its taxes much higher, at an effective rate of 44%, and was much stricter with licenses for growers and retailers. Only 334 retail shops across the state were approved by the State Liquor and Cannibas Board. First-month sales were $3.8M. The Board hastily increased the total licensed retailers to 556 after it became obvious that there were too few outlets (and tax revenue). Given supply and demand and all that, Washington State’s legal marijuana prices were 67% higher than Colorado’s in 2014. Washington’s Board has since reduced the effective tax rate but it’s still the highest of any state. The legal white market marijuana price in the state is often higher than the black market price.

As a consequence, Washington’s legal sales accounted for only about 30% of the state’s total estimated cannibas market (both the white and black markets), whereas Colorado’s legal sales met about 70% of total estimated demand in Colorado. Hence, a strong majority of Washington marijuana users continued to buy from existing black market sellers after legalization. This outcome was not only due to Washington State’s early higher prices but because there were fewer licensed sellers, especially when compared to Colorado. Price differences remain; Colorado’s current average market price is $82/oz. less expensive than Washington’s.

Lower marijuana tax rates may reduce overall tax revenues, but essentially can increase the market share of legal marijuana relative to the total demand, and make life harder for black market suppliers.

The crowd-sourced average market price for “high-quality” marijuana, posted by priceofweed.com, also varies considerably. The table shows that Oregon has the lowest market price, $210/oz. Washington DC’s price of $600/oz. stands out as the highest, but remember DC as yet has no legalized recreational marijuana sales due to Congress’ restrictions. It’s a fair assumption that in DC the quantity of marijuana demanded strongly exceeds the quantity supplied, hence high market prices.

In general, market prices in eastern states exceed those in western states. The average market price in northeastern states – DC, DE, MA, ME, NY, PA and VT – is $376/oz. The average price in western states – AK, AZ, CA, CO, NV, OR and WA – is $270/oz. A fair amount of premium-priced California marijuana ends up on the East Coast as well as points in between.

The chart below shows how US wholesale prices have dropped between April 2015 and June 2017, as state-legalized marijuana sales have dramatically expanded. 

Source: Cannabis Benchmarks. Wholesale price in dollars per pound.

The marijuana harvest usually occurs each fall, as shown with price decreases on the chart for the latter part 2015 and 2016. The expanding legal markets in Oregon, Colorado and Nevada contributed to the dramatic reduction in the 2016 fourth quarter price according to Cannabis Benchmarks. Wholesale cannabis prices dropped 18.6% in the first half of 2017.

The “biggest Kahuna” California market for legalized recreational marijuana is to begin in less than three months. But all is not going smoothly in the Golden State. Taxing white market marijuana is not likely an issue – the prospective marijuana tax rate for consumers is 15%. One concern centers on the long-time existence of a sizable black market whose suppliers have been loath to adopt new supply-side regulations. Another problem is that localities have important responsibilities for establishing rules and licensing retail dispensaries, but local and county governments are behind schedule in these essential duties.

Voter approval of Proposition 64 legalized recreational marijuana last November. It also decriminalized the possession of certain amounts of marijuana (it’s now a misdemeanor, not a felony), allowed individuals to grow six plants at home, set rules for the sale and cultivation of regulated plants, and sought to better manage the largely unregulated medical cannabis system. Unlike other states that embarked on creating a white market for marijuana, California has had a well-known, substantial black market that produces high-grade weed. California’s newly-enfranchised marijuana regulators face a unique conundrum that can be summed up in two words: Emerald Triangle.

Growers in Northern California’s Emerald Triangle region have produced large amounts of mostly outdoor, superior marijuana for decades. It’s the largest cannibas-producing area in the US. According to Arcview, its market value is about $7B. Many connoisseurs believe it’s the best in the world and are quite willing to pay high prices. California produces seven times more marijuana than it consumes, according to one estimate. Because the potential rewards are so significant, the Emerald Triangle along with the rest of California is almost certain to remain a major (illegal) exporter to other states even after the white market becomes established. However, the huge wildfires in Northern California aren't just destroying homes and vineyards; cannibas cropland is also going up in flames. For cultivators whose crop hasn't been directly destroyed, the fires' heavy smoke will reduce the value of their crop.  

So far only about 3,500 marijuana growers in the Emerald Triangle have applied for permits to farm within the white market. This number sounds like a lot of cultivators and would be in virtually any other region. But it represents just 11% of all growers in the Emerald Triangle. Many cultivators/growers have been dissuaded by what they consider significant effort needed to obtain a permit, as well as the fees, taxes and enduring regulatory requirements. If they stay beyond the new, white market system, these growers probably face lighter punishments and avoid paying taxes, fees and the costs of meeting environmental standards. The way one local grower put it, “Why do I have to get permits? My parents didn’t have to and my grandparents certainly didn’t have to.” Confirming this reluctance, Bruce Smith, a lieutenant with the Mendocino County Sheriff’s Office who leads the county’s efforts to shut down illegal marijuana farms stated, “The vast majority aren’t permitted.”

If these trifling levels of white-market participation continue through January, California may face the ironic circumstance of producing an insufficient amount of legal marijuana, despite being the nation’s largest domestic producer. That situation won’t reflect much balance between demand and supply; legal prices will likely spike and make the task of slaying the black market marijuana dragon difficult.

Can California sufficiently merge its large, existing black market with its nascent white market? It’s the key question that will influence the success of California’s initial foray into legal recreational marijuana. This issue hopefully can be resolved through discussions with growers, regulators, sellers and consumers before the New Year. Paraphrasing the late, great Tom Petty, I doubt if these discussion participants will be too alone, but they may be too proud. 
A Coda on Greedy Weed Bureaucrats.

New information became available on Halloween about the expected total taxes to be charged on California's legalized, recreational marijuana. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. Minimizing California's sizeable black market for marijuana is not likely.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics or other states’ experiences. Time will tell as January 1st approaches.