California's legal marijuana market is poised to hit $6.5 billion in sales by 2020 if the state passes a legalization measure this November, according to a report released Tuesday by The ArcView Group and New Frontier. Pictured: This photo taken on Thursday, May 26, 2016, shows a marijuana plant on the wall at the entrance to the "Altered State: Marijuana in California" exhibit at the Oakland Museum of California in Oakland, Calif. The museum exhibit is the first ever dedicated to the much debated drug. (Ben Margot, The Associated Press)

Report: Legalizing marijuana in California could create $6.5 billion market by 2020

California legalizing recreational marijuana could grow the industry there to $6.5 billion in 2020 — and also serve as a “watershed moment” for the industry in and outside the United States, according to a report released Tuesday.

Market research firms the Arcview Group and New Frontier delved into California’s massive and uniquely complicated cannabis industry to project its direction and what may be in store if voters pass Proposition 64 in November.

If the Adult Use of Marijuana Act succeeds and is implemented by 2018, California’s legal marijuana sales likely will climb by $1.6 billion within the first year, according to the Arcview and New Frontier market report.

That would put the state’s medical and recreational industry on track to hit $6.5 billion in revenue by 2020, up from $2.8 billion in 2015, according to the report.

To give a little perspective: The nation’s legal cannabis industry is expected to climb to $23 billion in 2020, up from $5.7 billion in 2015.

“We think the activation of the adult-use market in California will undoubtedly make California the new epicenter in cannabis,” said John Kagia, executive vice president of industry analytics for New Frontier.

The sheer size of the state — it ranks among the world’s top 10 economies — will help it maintain that status, Kagia said. Even with a fractured, unregulated medical industry, California already accounts for nearly half of all the nation’s legal cannabis sales, Arcview and New Frontier reported.

But California’s influence as a market-mover goes far beyond its size, Kagia said.

“There’s going to be a professionalism of the industry, an emphasis on innovation once the market is legal in California that will dramatically accelerate the industry in a way that legalization (efforts) in Colorado and Washington haven’t been able to do.”

Silicon Valley should play a leading role, both via capital as well as technical and intellectual expertise, Kagia and co-authors wrote in the report.

California also is poised to be a leader in creating rules for social pot use; should become a frontrunner in developing organic standards; and likely will become a hub for cannabis research, as the Adult Use of Marijuana Act calls for 10 percent of sales tax collected to be spent on drug abuse research and another 10 percent on cannabis research, according to the market study. The ripple effects could be vast and affect industries such as biomedical research, applied materials and nutraceuticals, among many others, he said.

Additionally, if California goes recreational then it’ll apply greater pressure on Mexico to legalize, the authors wrote:

The legalization debate south of the U.S. border has evolved quickly as illustrated by the evolution of Mexico’s President Enrique Peña Nieto who, in just six years, has transformed from one of Latin America’s most vocal drug warriors to a proponent of medical cannabis use and advocate for decriminalizing possession of up to an ounce for all adults. Legalization in California will only add fuel to the debate on cannabis law reform in Mexico and in other Latin American countries.

California’s medical sales should stay relatively flat, according to the report. Arcview and New Frontier project the medical market should decline to $2.53 billion in 2020 from $2.76 billion in 2015.

California also will face plenty of unique challenges if it were to legalize, Kagia said.

The state already has an “outsized scale” of cannabis production and is starting to see some land-grabs by pot prospectors. A greater supply should mean cheaper costs for consumers, but also could very well pinch the producers, according to the report.

Legalization also would raise questions about the viability of indoor growhouses and whether the energy costs could be prohibitive as more greenhouses open, Kagia said.

But perhaps one of the greatest challenges for California is whether it can overcome itself.

California’s medical market operated for nearly 20 years with very limited government regulation. There was no agency tasked with regulatory oversight or business licensing, no requirement for patients to register with the state, and essentially no market standards for product safety and quality. This led to significant problems with diversion of product from the legal to the illicit market, exposed early business operators to enforcement crackdowns, and made it difficult for the state to closely monitor the program due to the lack of centralized data and reporting.

In the fall of 2015, the state took steps to establish more stringent regulations for medical cannabis businesses, and individual jurisdictions will likely see even further policy adjustments in the coming years.

The stringent regulations came in the form of the Medical Cannabis Regulation and Safety Act, a two-year program intended to provide oversight for the medical industry, create a commercial license program and set consumer and environmental standards, according to the report.

Industry members told Arcview and New Frontier they’re concerned about how distribution policies outlined in MCRSA could result in higher prices for consumers, whether the costs would be too high for the majority of existing dispensaries to continue operating, and how local jurisdiction approvals would stymie the industry’s potential.

The Adult Use of Marijuana Act does have some solutions for those concerns; however, if the contested legalization ballot issue does not pass, it’s not necessarily a death knell for California or the nation’s industry as a whole, Kagia said, noting that other states have legalization measures up for vote. To some in the industry, AUMA’s failure would give the state the chance to implement MCRSA first and set up an established foundation, he said.

“While the failure of the measure in California would be a setback, broadly speaking, we do not think it is going to significantly impede continued forward progress that we have been seeing in the shifting public attitudes (toward legalization),” he said.