Investment Treaties and the Replacement of Stranded Investment

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.