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This article applies a new methodology for the assessment of environmental risk prevention expenditure to the adjudication process of international investment arbitration. The Disproportion Factor Model can be implemented by investment arbitration tribunals to evaluate the reasonableness of environmental regulations imposed by host states that have a damaging impact upon foreign investment activity, such as would be the subject for a claim of indirect or regulatory expropriation. In this setting the Disproportion Factor Model can help illustrate whether a host state measure is unreasonable and in that sense should engage the investor’s entitlement to compensation under international law. It also acts as an objective guide to the setting of an appropriate quantum of compensation for the injured investor by reference to the environmental benefits that the regulation aimed to achieve relative to their costs, as evaluated by a rational decision-maker. The formula should be consequently viewed as a useful tool in judicial analysis by international investment tribunals.
