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Investment treaties and the replacement of stranded investment

Author

Listed:
  • Henrik Horn

    (Research Institute of Industrial Economics (IFN)
    Centre for Economic Policy Research)

  • Mark Sanctuary

    (KTH Royal Institute of Technology
    IVL Swedish Environmental Research Institute)

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.

Suggested Citation

  • Henrik Horn & Mark Sanctuary, 2025. "Investment treaties and the replacement of stranded investment," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 25(3), pages 425-448, September.
    • Handle: RePEc:spr:ieaple:v:25:y:2025:i:3:d:10.1007_s10784-025-09674-0
    DOI: 10.1007/s10784-025-09674-0
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    Keywords

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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