Investment treaties and the replacement of stranded investment

Henrik Horn and Mark Sanctuary ()
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Mark Sanctuary: KTH Royal Institute of Technology

International Environmental Agreements: Politics, Law and Economics, 2025, vol. 25, issue 3, No 6, 425-448

Abstract: Abstract A common claim holds that investment treaties reduce the willingness of host countries to regulate foreign-owned, environmentally-stranded, investments. A counter-argument is that the treaties can yield incentives for environmentally-friendly replacement investment. This paper examines these claims in a simple formal setting with an initial investment and a potential replacement investment, both of which are protected by an investment agreement. The paper shows how the treaty protection weakens incentives for environmental protection. The paper also shows how the extent of environmental damage depends on the implementation of core legal notions, such as investor legitimate expectations, the full compensation requirement, carve-outs from compensation obligations, and what qualifies as an investment.

Keywords: Investment treaties; Environmental degradation; Regulatory chill; Legitimate expectations; Transition risk (search for similar items in EconPapers)
JEL-codes: F21 F23 F53 K33 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Investment Treaties and the Replacement of Stranded Investment (2024)
Working Paper: Investment Treaties and the Replacement of Stranded Investment (2024)
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DOI: 10.1007/s10784-025-09674-0

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