Oakland’s City Council is on the verge of passing what it sees as reparations for a U.S. drug policy that disproportionately punished people of color — but it’s an effort that might quickly backfire.

As it looks to pass laws this week to regulate the medical marijuana trade within the city, the council is considering rules to make the industry more inclusive of African American and Latino entrepreneurs.

The city will begin to award marijuana permits to people who have or want to start businesses in a trade that is expected to flourish if California eventually legalizes recreational weed. But the city’s ordinances would reserve half of those permits for applicants who fit a narrow set of criteria: Oakland residents who have lived for at least two years in a designated police beat in East Oakland that had a high number of marijuana arrests in 2013; or individuals who were incarcerated in Oakland for marijuana-related crimes within the last decade. Called equity applicants, these individuals must keep at least a 50 percent ownership stake in the business they seek to permit.

The council already gave initial approval to the ordinances and is scheduled to give final approval Tuesday. But the plan is drawing sharp criticism from people who say it actually would make it more difficult for black and brown people to operate cannabis businesses — and would undercut what could be a booming business in the city.

“It’s not actually addressing equity, and it may possibly be setting it back,” said Alex Zavell, a senior regulatory analyst for Oakland cannabis attorney Robert Raich.

Last-minute provisions

Councilwoman Desley Brooks pushed for the equity system, tacking on last-minute amendments to marijuana ordinances that had taken the city’s Cannabis Regulatory Commission 18 months to craft. Councilwoman Annie Campbell Washington added the provision for people with criminal records, characterizing it as a way to redress the racial injustices of the drug war.

A 2013 national report by the ACLU found that blacks were nearly four times as likely to be arrested for marijuana possession as whites, even though they used the drug at roughly the same rates. That imbalance is apparent in Oakland, where marijuana arrests are concentrated most in African American neighborhoods. Meanwhile, people with visible leadership positions in the cannabis industry are white.

“When you look at the cannabis industry around this country, it’s predominantly white,” Brooks said at the May 3 council meeting when the council initially approved the ordinances.

Oakland’s pot ordinances were designed to bring the city in line with new state laws that will regulate all aspects of the multibillion-dollar industry by 2018. For years, all but eight large dispensaries in Oakland have operated in a hazy gray market: Although they were required to register their businesses and pay 5 percent of their gross receipts to the city, they didn’t have permits to sell cannabis.

“Technically, we operate in the absence of a law,” said Andrea Unsworth, owner of StashTwist, a boutique delivery service that hawks everything from pain salves to pot-infused gummy worms.

City officials tolerated that system on the belief that California would eventually move toward thorough cannabis regulation — which happened when Gov. Jerry Brown signed a suite of new marijuana bills in October.

Suddenly, Oakland had a chance to legitimize its pot trade, creating thousands of jobs, attracting out-of-state investment and generating a cash windfall for city coffers. The city’s eight currently licensed dispensaries will be grandfathered into the new system.

But Zavell and other critics worry that the equity requirements are so narrow that Oakland’s entire marijuana permitting system will grind to a halt while officials wait for a single qualified equity applicant to materialize. According to the proposed rules, the city will have to follow what Zavell calls a “Noah’s Ark” model: If it has five regular pot licenses and five equity licenses, it cannot give out another regular license until it gives out an equity license.

While many residents and industry experts who spoke at the May 3 meeting agreed with the sentiments Brooks expressed, they warned that the proposed solutions will stifle innovation and open the door to graft. Some say the reparation attempt will sabotage a pot market that’s not only a vital source of tax revenue, but also a key part of Oakland’s cultural identity. This is, after all, the city that created an Oaksterdam district in its downtown corridor.

Critics said the proposed rules could force permit-seekers into “shotgun marriages” with East Oakland residents who live within the designated police beats. They also said the 50 percent ownership rule would restrict businesses from adding partners, expanding or liquidating assets.

“They’ll be saddled with more stringent rules,” said Matt Hummel, chair of Oakland’s Cannabis Regulatory Commission, who believes the council’s deployment of the term “equity” is misleading.

“To target people of color, then restrict their freedom of movement, is disgusting to me,” Hummel said.

Perhaps the biggest irony is that some African Americans and Latinos who already operate marijuana businesses in Oakland — and pay taxes — wouldn’t qualify for the equity permits and would get caught in the same bottleneck as everybody else.

Not covered by preferences

Among them is Unsworth, the black owner of StashTwist delivery service. Unsworth, a former bond analyst, doesn’t live in any of the six police beats that Brooks identified as having the city’s most marijuana arrests.

Oakland has 57 police beats in all, so the cluster that Brooks chose represents only a small fraction of the city.

“I agree with the intent,” Unsworth said. “But I think there are holes in it, and I don’t feel like they’re capturing what they think they’re capturing. ... I’m an African American woman who bootstrapped my business, and I’ve never lived in any of those police beats.”

Brooks did not return phone calls seeking comment.

As it stands, the ethnic and racial makeup of Oakland’s pot economy mirrors disparities in the nation at large. Of the eight dispensaries licensed to operate in Oakland, only one — Purple Heart Patient Center — is majority black-owned. Although many African Americans and Latinos work in the industry, most run smaller mom-and-pop enterprises, like Unsworth’s delivery service.

Unsworth said the schism arose because people of color typically don’t have the same economic resources as their white counterparts.

Backers needed

“You can’t get (traditional) business loans, so every company is bootstrapped — unless you happen to have an angel investor, which most black and brown people don’t have,” she said.

Steve DeAngelo, who owns Harborside Health Center, the Oakland dispensary that’s also the nation’s largest, said racial disparities in the pot market could be a residual effect of the drug war.

“It’s important to remember that the brunt of that war has been directed at people of color,” he said. “Once arrested, African Americans were more likely convicted, and more severely sentenced, and that would naturally make them more reluctant to get into the industry.”

Joe DeVries, the city staffer assigned to the Cannabis Regulatory Commission, said it’s too early to predict that the equity system will fail.

“I’ve heard a lot of ‘what ifs,’” he said. “I think it’s clear what the council is trying to do — lower the threshold and bring in people who’ve been historically locked out of this business.”

Rachel Swan is a San Francisco Chronicle staff writer. Email: rswan@sfchronicle.com