Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1479: Investment Treaties and the Replacement of Stranded Investment

Henrik Horn () and Mark Sanctuary
Additional contact information
Henrik Horn: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden, and Centre for Economic Policy Research, London
Mark Sanctuary: IVL Swedish Environmental Research Institute, Stockholm, Postal: and KTH, Royal Institute of Technology, Stockholm

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 stylized setting with a stranded investment and a potential replacement investment, both of which are protected by an investment agreement. The paper shows how 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

JEL-codes: F21; F23; F53; K33

Language: English

29 pages, First version: November 22, 2023. Revised: February 9, 2024.

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