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Working Paper No. 1479

Investment Treaties and the Replacement of Stranded Investment

Working Paper
Horn, Henrik and Mark Sanctuary (2023). “Investment Treaties and the Replacement of Stranded Investment”. IFN Working Paper No. 1479. Stockholm: Research Institute of Industrial Economics (IFN).

Henrik Horn, Mark Sanctuary

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.

Henrik Horn

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