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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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    References listed on IDEAS

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    1. Guttorm Schjelderup & Frank Stähler, 2021. "Investor‐state dispute settlement and multinational firm behavior," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 1013-1024, September.
    2. Aisbett Emma & Karp Larry & McAusland Carol, 2010. "Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-35, December.
    3. Horn, Henrik & Tangerås, Thomas, 2021. "Economics of international investment agreements," Journal of International Economics, Elsevier, vol. 131(C).
    4. Emma Aisbett & Larry Karp & Carol Mcausland, 2010. "Police Powers, Regulatory Takings and the Efficient Compensation of Domestic and Foreign Investors," The Economic Record, The Economic Society of Australia, vol. 86(274), pages 367-383, September.
    5. Eckhard Janeba, 2019. "Regulatory chill and the effect of investor state dispute settlements," Review of International Economics, Wiley Blackwell, vol. 27(4), pages 1172-1198, September.
    6. Dolzer, Rudolf & Schreuer, Christoph, 2012. "Principles of International Investment Law," OUP Catalogue, Oxford University Press, edition 2, number 9780199651801.
    7. Frank Stähler, 2023. "An optimal investor-state dispute settlement mechanism," Journal of Economics, Springer, vol. 138(1), pages 1-16, January.
    8. Konrad, Kai A., 2017. "Large investors, regulatory taking and investor-state dispute settlement," European Economic Review, Elsevier, vol. 98(C), pages 341-353.
    9. Ossa, Ralph & Staiger, Robert W. & Sykes, Alan O., 2023. "Standing in international investment and trade disputes," Journal of International Economics, Elsevier, vol. 145(C).
    10. Emma Aisbett & Jonathan Bonnitcha, 2021. "A Pareto-Improving Compensation Rule for Investment Treaties," Journal of International Economic Law, Oxford University Press, vol. 24(1), pages 181-202.
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    Cited by:

    1. Horn, Henrik & Lavenius, Axel & Sanctuary, Mark, 2024. "Investment Treaties and the Threat to Biodiversity," CEPR Discussion Papers 19210, C.E.P.R. Discussion Papers.

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    More about this item

    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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