Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1450: Investment Treaty Reform when Regulatory Chill Causes Global Warming

Henrik Horn ()
Additional contact information
Henrik Horn: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics,, Stockholm, Sweden, Bruegel, Brussels, and Centre for Economic Policy Research, London

Abstract: Developing countries have 1300+ investment treaties with developed countries. Investment treaties are often alleged to constrain developing country climate policies. This paper examines four treaty reforms that are often suggested as remedies to such regulatory chill. It considers an investment treaty that protects a stranded developed country investment in a developing country. The reforms are compared with regard whether they can induce the developing country to regulate the investment, welfare effects, and political attractiveness in other respects. The reforms are shown to have features that seem to have gone unnoticed in the debate. Exclusion of investor-state dispute settlement (ISDS) may be ineffective due to a hold-up problem, and if effective requires unlawful regulation by the host country. A shortening of a sunset period applicable to unilateral withdrawal can postpone regulation until expiry. A reduction in the amount of stipulated compensation can induce the developing country to phase out the stranded investment, but will then require a compensation payment from the developing country to the developed country investor. The reform with best potential to address stranded investment problems appears to be an increase in a carve-out from the compensation requirement for measures with sufficiently positive climate effect.

Keywords: Investment treaties; Climate; Stranded assets; Regulatory chill

JEL-codes: F21; F23; F53; K33

Language: English

36 pages, First version: December 19, 2022. Revised: April 23, 2024. Earlier revisions: February 13, 2023.

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