What the California Environmental Quality Act Means for Cannabis Operators in the Golden State
Cannabis is big business in California. Last year, tax revenue from sales was $1.2 billion and is expected to be at least $1.3 billion this year. Of course, you cannot sell products if you do not have it and you must raise prices if the product’s unit price is raised. It is highly likely this increase in the retail price will go up based on a new requirement which has been placed on growers by the legislature.
The California Department of Cannabis Control has its own set of procedures and requirements for licensing. For example, if you want to cultivate you must have a cultivation license; if you want to grow seedlings for use by others you need a nursery license; if you want to dry, cure, and trim cannabis, you need a processors’ license. In California, the most critical permits that are needed relate to water which are issued by the Fish and Game department or one of the California Regional Water Quality Control Boards.
California has made growing cannabis much more problematic and more expensive by requiring analysis under the California Environmental Quality Act (CEQA) to obtain an annual license. Adopted in 1970 under the auspices of then-Governor Ronald Reagan, CEQA’s concept was straightforward: The government should consider and mitigate the environmental impacts of public projects before approving a public project. In this case, the public project would be the permits required for the construction and maintenance of a cannabis growing farm/facility. Recent legislation is now requiring that provisional license applications will only be issued until June 30, 2022, and after that a holder of a provisional license must show that efforts are being made to comply with CEQA but anyone seeking to obtain a new license beyond that date now must show full CEQA compliance before the license can be issued. Those already with provisional licenses will be able to produce products without having to go through CEQA process costs, while those who seek to obtain a license after June 30, 2022, must bear the CEQA process and compliance costs.
While simple in purpose, the intricacies of the CEQA process have become utterly complicated, time consuming and expensive. It has also become the weapon of choice for any individual or environmental group to attack, stall, or demand changes before all CEQA provisions have been completed which would then allow the governmental entity to grant the necessary permits or approvals required for the project. It is not unusual for the CEQA process to include an extremely long administrative process and possibly litigation. Litigation is relatively easy, in part because it has a self-executing clause that allows almost anyone to ask a court to order a complete environmental review if they do not like the outcome of a CEQA determination. The CEQA process and the possible litigation can require a significant expenditure of funds and/or a delay before being able to grow and make a profit.
Under CEQA the governmental entity which is involved cannot grant the necessary permit without a required environmental-impact report (EIR). The EIR extensively documents all possible harms to the environment, setting out potential alternatives, and organizing public hearings for feedback. It is not unusual for a substantial project to generate EIRs of one thousand pages or more to cover all the possible issues. It is serendipitous that California’s CEQA Guidelines, which set the parameters for how environmental review must be conducted, has swelled from a 10-page checklist to a 500-page tome, covering a range of issues which now includes climate change/greenhouse gas emissions. Of course, it is possible that an EIR for a cannabis related project may not require an extensive EIR, nonetheless, if it does, the cost can be high. EIRs are usually created by a specialized consultant and attorneys who work with those consultants.
While there are many issues that an EIR must cover they must at least address the following:
- Aesthetics/Visual Resources
- Biological Resources
- Cultural Resources
- Geology and Soils
- Hazards and Hazardous Materials
- Land Use
- Public Services
Further, it is not unusual for the government agency involved to have additional requirements for an EIR to consider.
The other part of CEQA that can influence the decision to build/not build, operate/not operate is the issue of mitigation. The EIR must determine what are potential significant environmental impacts and provide feasible measures to mitigate those impacts. CEQA broadly defines mitigation measures as including the following kinds of measures: 1. Avoiding the impact altogether by not taking a certain action or parts of an action. 2. Minimizing impacts by limiting the degree or magnitude of the action and its implementation. Assuming the governmental entity involved will grant permits or take other such action, the mitigation measures selected must be complied with as part of the development/construction process. The mitigation alone can be costly, depending on the scale of the project.
If CEQA compliance is required, you should add the possible cost of compliance in your business plans and make sure, if you need to deal with CEQA, that you have appropriate consultants and counsel on board. You should also consider using a public relations firm to drum up general approval from the public for your project as anything that can be done to lessen the opposition to the project is worthwhile.
This article is for information purposes only and should not be construed as legal advice, business advice, investment advice or tax advice.