The Caco-2 cell model is widely used as a model of colon cancer and small intestinal epithelium but, like most cell models, is cultured in atmospheric oxygen conditions (∼21%). This does not reflect the physiological oxygen range found in the colon. In this study, we investigated the effect of adapting the Caco-2 cell line to routine culturing in a physiological oxygen (5%) environment. Under these conditions, cells maintain a number of key characteristics of the Caco-2 model, such as increased formation of tight junctions and alkaline phosphatase expression over the differentiation period and maintenance of barrier function. However, these cells exhibit differential oxidative metabolism, proliferate less and become larger during differentiation. In addition, these cells were more sensitive to cannabidiol-induced antiproliferative actions through changes in cellular energetics: from a drop of oxygen consumption rate and loss of mitochondrial membrane integrity in cells treated under atmospheric conditions to an increase in reactive oxygen species in intact mitochondria in cells treated under low-oxygen conditions. Inclusion of an additional physiological parameter, sodium butyrate, into the medium revealed a cannabidiol-induced proliferative response at low doses. These effects could impact on its development as an anticancer therapeutic, but overall, the data supports the principle that culturing cells in microenvironments that more closely mimic the in vivo conditions is important for drug screening and mechanism of action studies.