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RESEARCH

The economics of leadership in climate change mitigation

Gregor Schwerhoff Potsdam Institute for Climate Impact Research, PO Box 601203, 14412 Potsdam, GermanyCorrespondenceschwerhoff@pik-potsdam.de
Pages 196-214
Published online: 23 Feb 2015

RESEARCH

The economics of leadership in climate change mitigation

Abstract

Which kind of reaction can a nation or group of nations expect when leading by example in climate policy? This synthesis article describes possible positive reaction mechanisms from different fields of economics, some of which have scarcely been linked to climate economics previously. One effect may be behavioural, a reaction motivated by fairness, reciprocity, or norms. Second, other nations may interpret the leader's action as a signal on his preference or the value of the objective and adjust their own policy based on the new information. Third, the leader may provide a service to other nations, which decreases their costs and risks. The followers could benefit by learning successful policies, adopting technologies, and obtaining information on the cost of environmental policy. All of these mechanisms have in common that the leader sets an example with the intention of motivating others to contribute to the public good.

Policy relevance

A large body of both theoretical and empirical evidence shows that leading by example in climate change mitigation by a small group of nations has important potential for motivating other nations to follow. Modern economics has identified a range of mechanisms to explain why simple free-riding is unlikely to dominate the reaction to leadership. One such mechanism is described by behavioural economics. Humans often behave as conditional cooperators, meaning that they are willing to do their bit once a leader has done his. A second mechanism is the transmission of a credible signal that the leader considers climate change mitigation to be important. Finally, the leader gains knowledge, which spills over to other countries and thus moves their cost–benefit ratio in favour of mitigation. This evidence implies that leadership provides a promising alternative to stimulate the global cooperation that will eventually be needed to stabilize the climate.

1. Introduction

Years of research in the fields of climate physics, policy options, and sustainable technologies have produced a rather clear picture indicating that climate change should be mitigated and the manner in which this can be achieved. After a large number of failed climate summits, however, there is still no clear path to achieve the required cooperation to provide this global public good. The role of leadership through unilateral action is contended. Although the UK Government (2011) considers EU leadership in reducing emissions ‘crucial in building momentum internationally’, the President of the 19th Conference of the Parties (COP 19) in Warsaw in 2013 and then Minister of the Environment in Poland, Marcin Korolec, stated in the run-up to the COP ‘The idea of leading by example does not work’ (Die Zeit, 2013).

This article provides a synthesis of the contribution of economic research to this debate. It describes a range of mechanisms in favour of unilateral action or leadership. A single country or region implementing effective climate policy may provoke a free-rider effect in other countries, meaning that they reduce their own efforts. However, this negative mechanism is countered by a number of mechanisms that would lead other countries to follow suit and step up their climate change mitigation efforts. Taken together, it appears that the potential of leadership as a means of achieving cooperation on climate change has been underestimated to date.

The article contributes in two ways to the understanding of leadership in the provision of global public goods and climate change in particular. First, it provides a comprehensive compilation of the positive effects that leading by example might produce. As the introductory question on the reactions to leadership cannot be answered with certainty, the article aims to provide an overview of the possibilities. Although the negative reaction mechanism of free-riding is widely known, the positive mechanisms relying on behavioural and information economics have been linked to climate economics more recently.

Second, the article points out the importance of leading by example in triggering follower contributions. The literature provides a range of different mechanisms, all showing how setting a visible example in public good provision increases contributions to the public good by others. This type of leadership guides the selection of fields surveyed. Only leadership mechanisms are described where the leader sets an example with the intention of increasing the contribution by others. The coalition formation literature based on Carraro and Siniscalco (1993) and Barrett (1994) is thus excluded, as it does not focus on the stimulating effect of leadership on others. Leadership in negotiations is excluded because it does not focus on setting an example by contributing to the public good. Finally, the literature on the Porter hypothesis is excluded, as the objective of providing a public good is not central to it.

Leading by example in the context of climate policy takes the form of contributing to the public good by unilaterally implementing climate change mitigation. Within this frame, three categories of positive reaction mechanisms are identified. The first is a behavioural reaction.1 Out of a sense of fairness, followers may want to reduce inequity. A leader's action may establish a new norm or modify the existing norm, so that followers that are guided by norms to some extent will step up their efforts. Second, the action may help in overcoming information asymmetries. If lack of knowledge on preferences or the relative value of avoiding climate change blocks cooperation, then a leader's action may indirectly provide this knowledge. Third, followers could benefit directly from the leader's pioneering actions. This improved cost–benefit ratio may change the assessment of other nations in favour of mitigation. By starting to mitigate, the leader engages in a learning process from which potential followers benefit. These benefits include sustainable technology, knowledge about successful policies, and reduced uncertainty about the cost of mitigation. The mechanism of the third category is thus to push the cost–benefit ratio of potential followers over a threshold so that they start mitigating on their own.

A first strand of related literature is the traditional economic point of view on unilateral action as described in the theoretical analysis in Hoel (1991). It explicitly assumes that countries are purely dictated by their self-interest. In this setting, any unilateral contribution to the public good will provoke a free-rider effect. Other countries benefit from the unilateral action and reduce their own contributions. Using game theoretic coalitional stability analysis in a numerical integrated assessment model, Bréchet et al. (2010) estimate the quantitative responses of specific major players to the policy leadership of the EU. They find that the strategic policy reaction of other countries is very limited. Only when countries are connected through emissions trading can a noteworthy effect be provoked through an increased permit price. In contrast to this literature, the present article considers models that relax the assumptions that countries are motivated by narrow self-interest, that information is complete, and that nothing can be learned by implementing climate policy. Allowing for more complex preferences, asymmetric information and knowledge transfer from the leader to potential followers makes the positive effects listed above possible.

A related argument on the benefits of environmental policy, even in the absence of a climate agreement, is the Porter hypothesis, developed in Porter and Linde (1995) and refined in Xepapadeas and de Zeeuw (1999), Mohr (2002), and André, González, and Porteiro (2009), among others. According to this hypothesis, environmental policy induces innovations that increase the competitiveness of the policy area to such an extent that it overcompensates for the cost of adapting to the policy. In this approach, direct gain for the leader is central, and the provision of a public good is marginal. In the approach taken in this article it is the other way around. It relies on the strategic response of other countries to also adopt an ambitious environmental policy.

A third strand of related literature is taken from the point of view of political science on climate leadership. This literature considers the effect of different modes of leadership on multilateral negotiations and in particular the COPs. As it considers the impact of leadership, it is complementary to the analysis in this article, which is concerned with the mechanisms of leading by example. Young (1991) and Underdal (1994) set out the general framework by defining the different modes of leadership, including leading by example. Kilian and Elgström (2010) point out the ambiguous perception of leading by example of the EU. Karlsson, Hjerpe, Parker, and Linnér (2012) find that actors devoted to promoting the common good are most likely to be perceived as leaders at the COPs. Saul and Seidel (2011) show that four out of five leadership modes employed by the EU correlate positively with the degree of cooperation achieved at COPs 1 to 14.

The remaining sections follow the categories identified above. Section 2 clarifies the meaning of leadership used in this article and justifies this choice. Section 3 describes the behavioural aspects of leadership in climate change mitigation. Section 4 discusses the role of leadership in breaking the deadlock created by asymmetric information on climate change. Section 5 is concerned with the tangible benefits of leadership through mitigation for followers. Section 6 concludes.

2. The concept of leadership

Parker and Karlsson (2014) provide a systematic approach to leadership in international cooperation. Leadership has been defined as an ‘asymmetrical relationship of influence in which one actor guides or directs the behaviour of others towards a certain goal’ (Underdal, 1994 ) and as ‘the action of individuals who endeavor to solve or circumvent the collective action problems that plague efforts of parties seeking to reap joint gains’ (Young, 1991). These and other influential definitions have four key components in common: the leader, the follower, the mode of leadership, and the goal of leadership. The modes of leadership can be grouped into four different types. Structural leadership is pursued through coercion or constructive inducement. Directional leadership works through leading by example. Idea-based leadership is concerned with pointing out the problem and promoting policy solutions. Instrumental leadership concentrates on negotiation and the achievement of deals.

Climate change cannot be solved through structural leadership because political powers are neither willing nor capable of imposing mitigation goals on each other. There is widespread agreement that idea-based and instrumental leadership should continue to be used to pursue a global agreement, but also an increasing skepticism that this alone will succeed after a series of past failures. This explains the importance given to the debate on directional leadership. It is also the reason we narrow the analysis to this mode of leadership here.

The economic literature on leadership concentrates almost exclusively on directional leadership. An illustrative example for this is the title of one of the earliest economic articles on the topic in Hermalin (1998). The signalling effect of leadership described in Hermalin (1998) is not the only effect of leadership, as will be shown below. The focus on leading by example, however, remained.

The difference between stating an intention and leading by example has been tested experimentally. Dannenberg (2014) finds that leading by example is much more effective in stimulating cooperation than a non-binding pledge (leading by words). Pogrebna, Krantz, Schade, and Keser (2011) show that contributions by followers as a reaction to verbal announcements are reduced when a leader has failed to carry out previous announcements.

Some articles question the effectiveness of leading by example on empirical grounds. Parker, Karlsson, Hjerpe, and Linnér (2012) interpret the passage of the energy and climate package by the EU in December 2008 as leadership by example. Using surveys of officials at COPs 14 and 15, they find that ‘the EU's levels of leadership recognition failed to match its self-image and large numbers of followers did not embrace the EU's negotiation goals’. Bäckstrand and Elgström (2013) observe that ‘the EU has primarily relied on a directional leadership strategy’. Part of this strategy was leading by example through domestic action, including the 2007 announcement of reducing emission by 20% until 2020 and the 2008 energy and climate package. They then come to the conclusion that this directional leadership was unsuccessful at COP 15 in Copenhagen.

These critical results might indicate that two important components for successfully leading by example have been missing. First, leadership requires a substantial and credible contribution to the public good. The low price for certificates at the EU Emissions Trading Scheme (EU ETS) and the slow decline in aggregate CO2 emissions2 might indicate that EU leadership so far has actually been more idea-based than directional. According to Kilian and Elgström (2010) ‘some observers question the correspondence between what the EU says and what it does’. Bäckstrand and Elgström (2013) cite sources claiming that the EU's actions were neither credible not sufficiently ambitious. Second, the mechanisms described below might take more time to show an effect, in particular those based on the acquisition of knowledge, as described in Section 5. In addition, leadership can not only work through achieving a global agreement in the short run. It might work through gradually increasing public good contributions (in the form of substantial mitigation effort), which would eventually facilitate a global agreement.

3. Behavioural aspects of leadership

As we will discuss in the following, experimental evidence on economic decision making has revealed that human behaviour is guided to some extent by concepts like fairness and norms. In certain settings at least, self-interest is thus not the only motivation for decisions. Based on the evidence, theories have been developed that define preferences and utility functions in a way that can explain apparently altruistic behaviour in a broad range of experiments. When applied to experiments with a leader they can explain why leadership makes a difference: other players observe the leader's decision and may adjust their own contribution towards that of the leader.

There is no immediate reason why behavioural phenomena observed in the laboratory should also guide the behaviour of nations. However, some indication can be found that the interaction of governments on climate change is not only motivated by direct self-interest. First, we do observe governments cooperating on projects where a strict selfish maximization would require free-riding. The Kyoto Protocol as an example highlights that this cooperation is far from being fully efficient in providing a public good. It does indicate, however, that governments are not the narrow payoff-maximizers postulated in models such as those of Hoel (1991) and Varian (1994), where unilateral action does not achieve an improvement in public good provision. Second, equity and fairness is stated to be an important aspect in negotiations on climate change and can be found in the declarations of climate negotiations. Lange, Vogt, and Ziegler (2007) provide quantitative evidence on how important these statements are in climate negotiations. Third, the electorate is made up of partly altruistic individuals. Fischbacher and Gächter (2010) find that 55% of their subject pool behave as conditional cooperators. Governments may consider this when communicating their policies to the domestic audience. Behavioural economics investigates human preferences, not a lack of rationality. Governments might thus behave broadly along similar lines. Lange and Vogt (2003) quote ‘The Hague Mandate’, of the Climate Action Network (CAN), which found broad support by international organizations and demands a fair distribution of emissions rights.

There are examples where leadership has triggered environmental protection and an indication that this has to some extent been achieved since the leader established a new norm. Bodansky (2000) gives examples of unilateral action taken by Great Britain in 1967, which led to the International Convention Relating to Intervention on the High Seas in Cases of Oil Pollution Casualties, and of action taken by the US in 1970 that led to the International Convention for the Prevention of Pollution from Ships (MARPOL).

Given the advances in behavioural economics and the importance of fairness and social norms, Brekke and Johansson-Stenman (2008) consider it ‘surprising that behavioral economics has had so little influence on the economics of climate’. This section is thus written in the tradition of articles like Hasson, Löfgren, and Visser (2010), which ‘believe that the behavior of individuals revealed in the lab context can be used as a basis for understanding and analyzing key factors that underlie decision making on mitigation and adaptation on the country level'. This also includes Lange and Vogt (2003), Lange (2006), Johansson-Stenman and Konow (2010), and Barrett and Dannenberg (2012).

3.1. Theoretical concepts

Contrary to the theoretical predictions in Hoel (1991) and Varian (1994), there are a number of public good experiments with the basic finding that the provision of public goods is more efficient when there is a leader. This is found when comparing two settings. In the first, all participants contribute simultaneously. In the second, one participant makes a contribution first. The first contribution can be observed by the other participants before they make their contributions. It usually turns out that contributions in the second case are higher than in the first case. These results seem at odds with simple explanations of rational self-interest. Two theoretical approaches have been proposed as an explanation.

The first explanation reflects a preference for fairness, equity, and reciprocity. In this explanation the followers adapt their own contribution to that of the leader out of a desire to behave fairly towards him. Fehr and Schmidt (1999) define fairness as inequity aversion, meaning that people ‘are willing to give up some material payoff to move in the direction of more equitable outcomes’. The article argues that the assumption that a fraction of people is motivated by fairness explains a wide range of apparently contradictory evidence on whether or not fairness considerations are an important motive. Similarly, on looking for a consistent pattern in disparate laboratory observations, Bolton and Ockenfels (2000) propose a model where ‘people are motivated by both their pecuniary payoff and their relative payoff standing’. Following a proposition in Rabin (1993), Falk, Fehr, and Fischbacher (2008) show that in addition to the preference for fair outcomes, fairness intentions matter.

The second explanation concerns imitation and social norms. In this explanation, the followers observe the leader's contribution and either imitate his contribution or infer information from it about a social norm regarding the size of contributions. Imitation has been explored by evolutionary game theory. As Mailath (1998) points out, successful behaviour becomes more prevalent not only because of selection pressure, but also through imitation. Imitation has evolved because it accelerates the learning process towards more successful behaviour. According to Fehr and Fischbacher (2004), norms have been crucial in the development of the high degree of cooperation that distinguishes humans from other animals. Norm enforcement is driven by the availability of sanctions as well as non-selfish motives. Norms and imitation are grouped into one, as they both rely on evolved patterns of behaviour that may violate the two ‘heroic assumptions’ of neoclassical economics, maximization and consistency, as Mailath (1998) put it.

Hoel (1991) raises the issue that ‘in a game theoretical context, it is not obvious how to define unilateral actions by one country, since the Nash equilibrium is completely determined by the payoff-functions of the countries'. He himself solves the issue by assuming a second payoff function for one country with higher preferences for environmental protection and comparing the Nash equilibria resulting from the two payoff functions. Theoretical articles explaining experimental evidence in this section resolve it in a different manner. They use one type of utility function and vary the game structure. A leadership effect is said to occur when a game structure allowing for leadership achieves a more efficient outcome than a game structure without leadership.

3.2. Experimental evidence

Since the first true leadership experiment in a public good game in Moxnes and Van der Heijden (2003), a number of related experiments have been designed to better understand why leadership has a positive effect on contributions and which factors weaken or strengthen it. This section traces some of the important steps in refining the understanding of leadership.

Moxnes and Van der Heijden (2003) frame their game as a public good game on climate change. In groups of five, each member can invest an initial endowment in a polluting activity. The investment increases the personal payoff, but less than it harms the others. The private optimum is thus to invest the entire endowment, while the social optimum is to not invest at all. When there is a single player (the leader) making his investment first, followers invest 13% less in the polluting activity. Leadership thus increases efficiency. The result is surprising, because the Nash equilibrium would require participants to invest the entire endowment both with and without leadership.

Subsequent research was aimed at understanding how the leadership effect can be explained. Coats, Gronberg, and Grosskopf (2009) test the interaction of sequential moves (leadership) with a refund rule. The refund rule means that the public good can only be provided when a threshold is reached, and pledged funds are returned otherwise. They find that the refund rule increases efficiency when contributions are simultaneous, but not when there is a leader. It thus appears that leadership and the refund rule are substitutes in providing coordination.

Because leadership serves as a cooperation device, it should be clarified why such a device is necessary in the first place. There is broad evidence that cooperation is conditional, so a leader can provide an anchor in a system where every decision maker waits for others to move first. Laboratory evidence on conditional cooperation (Cooper, DeJong, Forsythe, & Ross, 1996; Hayashi, Ostrom, Walker, & Yamagishi, 1999; Watabe, Terai, Hayashi, & Yamagishi, 1996) has recently been complemented and confirmed by field evidence (Frey & Meier, 2004; Alpizar, Carlsson, & Johansson-Stenman, 2008; Shang & Croson, 2009). The field experiments exploit settings where people donate money and are unaware of the experiment. Before the donation, the experimenters inform them how many others also donate, or how much others donate. On average, the donors adjust their donation towards the given reference point. According to Levitt and List (2007), this field evidence is an important step towards generalizing the results found in the laboratory. Self-selection into the experiment and unrealistic stakes, for example, can be ruled out in this way.

The results in Glöckner, Irlenbusch, Kube, Nicklisch, and Normann (2011) indicate that leading by example is successful, because it constitutes genuine sacrifice. They distinguish between the ‘input’ given by the leader and the ‘output’ received by the other players. A sacrifice is a contribution that is not profitable if it is not followed. The article finds that sacrifice has an important role in motivating second-movers to make a contribution to the public good. This confirms the finding of Falk et al. (2008) that intentions of cooperation (the input) matter, and not only outcomes (the output). Reciprocity thus not only depends on the amount of the contribution to the public good, but also on the degree of self-sacrifice related to it. Contributions that are not ‘painful’ are not honoured as much.

There is evidence that fairness concerns can explain the reaction to leadership. Levati, Sutter, and Van Der Heijden (2007) consider the role of heterogeneity in endowments. Heterogeneous endowments make it less clear what a fair contribution of each player to the public good is. Leadership increases contributions both with heterogeneous and homogeneous endowments. However, the effect is weaker in the case of heterogeneous endowments and weaker still when there is no information on endowments. It thus appears that the effect of leadership depends on how clear it is what a fair solution is. The sense of fairness is also present in Gächter, Nosenzo, Renner, and Sefton (2010), where followers are willing to punish a first mover for free-riding.

We have seen the role of coordination, sacrifice, and fairness for leadership. A number of attempts at improving the leadership effect provide further insight into the mechanism behind it. Rege and Telle (2004) find that cooperation is increased when the identity of contributors is revealed, thus making it public how the individuals behave. As an explanation for this effect, the authors suggest a preference for social approval. This preference has been conjectured by Akerlof (1980) and others.

The effect of leadership is strongly improved when it is voluntary. In Rivas and Sutter (2011), one of the participants can volunteer leadership by setting an example. In contrast to related papers like Haigner and Wakolbinger (2010), this volunteer can be any of the group members. Groups in which leadership is voluntary make much higher contributions than groups where leadership is enforced exogenously. Voluntary leadership is compared to exogenously enforced leadership as well as groups without leadership (where all group members contribute simultaneously). Another result is that leaders contribute significantly more than followers. A difference between voluntary and exogenous leadership may be that in voluntary leadership, the most generous individuals become leaders. Another possible explanation is that there is more reciprocation when leadership is voluntary.

Voluntary leadership is more effective, but how common is it? Both Rivas and Sutter (2011) and Arbak and Villeval (2013) find that about a quarter of subjects are willing to volunteer as leaders. In Arbak and Villeval (2013), 57% of the groups of three players studied have a voluntary leader, so they describe voluntary leadership as ‘common’.

3.3. Relevance for climate change mitigation policy

The results of experiments such as in Moxnes and Van der Heijden (2003) provide the basis for the idea that leading by example might contribute to resolving environmental problems and that free-riding should not be taken as given. It should be noted, however, that this is based on contributions to the public good. When the public good is climate change mitigation, only CO2 emission reductions might have an effect. The mere installation of a policy such as the EU ETS might not be sufficient as long as it does not substantially reduce total emissions. Announcements on future emission reductions will not have an effect if they are not credible.

The results of Coats et al. (2009) point to leadership acting as a coordination mechanism, which can fulfil the same role as other mechanisms such as the refund rule. Leadership would thus work as a technique for channelling a conditional willingness for cooperation and fairness. In the climate context, the public good contribution of a leader nation would thus be aimed at conditional cooperators among other nations. These other nations could make their own contribution and be sure that others were not taken advantage of them.

As climate change mitigation cannot be obtained without a certain degree of ‘self-sacrifice’ in the form of economic costs, there is no danger of followers doubting the fairness intention of the leader. The ‘false’ leadership analysed in Glöckner et al. (2011) thus seems to be no threat to the effectiveness of leadership.

The result in Levati et al. (2007) whereby leadership is less effective when endowments are heterogeneous may amount to an effect similar to that in Glöckner et al. (2011), in that leadership is not successful when it does not involve sacrifice. Followers may suspect that the leader is not contributing a significant part of his endowments. The strong heterogeneity of ‘endowments’ among nations may thus work against the effect of leadership, in particular when the leader's contribution is relatively small.

By contrast, leadership on climate change mitigation is necessarily voluntary. This is quite evidently a difficulty, as voluntary leadership is not frequent. Although 43% of subjects in Dannenberg (2014) volunteer leadership by words, only 13% lead by example. However, once there is a voluntary leader, the experimental evidence in Guth, Levati, Sutter, and Van Der Heijden (2007), Rivas and Sutter (2011), Arbak and Villeval (2013) and others suggests that the leader can expect significant increases in contributions by followers. The voluntary nature of leadership adds to its credibility because it demonstrates an intrinsic motivation.

4. Asymmetric information

Section 3 can be seen as treating the issue of to what degree people cooperate and how leadership can work in coordinating this cooperation. We now assume that there is a certain willingness to cooperate and allow information to be asymmetric. The asymmetric information might hinder cooperation so that outcomes are much less efficient than they would be with full information. In this situation, leadership can transmit crucial information in a credible way and thus facilitate cooperation.

The reason why asymmetric information can obstruct cooperation is that countries have an incentive not to be truthful in their statements concerning climate change mitigation. Every country has an incentive to say whatever makes others mitigate more. Negotiators of different countries know each others' positions very well after a large number of COPs on climate change. They might, however, simply repeat their strategic lies to each other. Kilian and Elgström (2010), for example, cite officials at COP 14 from China, Namibia, and Venezuela as perceiving a mismatch between the words and actions of the EU. In such a situation, leadership action could break the informational deadlock by conveying information credibly.

4.1. Theoretical concepts

Benjamin E. Hermalin provided the theoretical groundwork for understanding the role of leadership for public good provision when there is asymmetric information. In Hermalin (1998) he points out the strategic difficulty of transmitting information credibly when the quality of the public good is not common knowledge. A leader must convince his followers that he is transmitting the correct information and is not misleading them. Contrary to authority, a leader cannot coerce his (potential) followers and must thus induce them to follow voluntarily. The leader can use sacrifice and leading by example to signal that an activity is worth something. In leading by example the leader shows, through his own activity, that it is worth it. Hermalin (2007) follows up on Hermalin (1998) by extending the framework to a repeated game. This allows the leader to build up credibility, which will facilitate communication.

Vesterlund (2003) applies a similar model to the case of charity. Fundraisers announce contributions, even though previous theory predicts that contributions are higher when no information on other contributions is available. The crucial new feature is imperfect information on the quality of the charity. Announcements of early contributions reveal the quality of the charity and thus motivate further contributions. In an extension of this model, Andreoni (2006) assumes that the public good can not only take two values (good or bad), but several. This creates the additional difficulty that the initial contribution could be understood as a strategic manipulation to support a mediocre project. The initial contribution thus has to be exceptionally large in order to be credible.

Brandt (2004) applies the theory directly to international environmental problems. He considers a variant of the model in Hoel (1991) by introducing an information structure similar to Hermalin (1998). Three additional assumptions are made to the model in Hoel (1991). First, the unknown costs are assumed to be correlated. Second, countries can acquire private information about their costs. Third, it is worthwhile for one country to acquire this private information. The third assumption is justified by the author with a situation where the urgency of the problem becomes clear gradually until it is optimal for one country to invest into the acquisition of knowledge. In the model of Hoel (1991) the Nash strategy requires countries to free-ride, but the Nash strategy in the model of Brandt (2004) allows leadership to have a positive effect on the mitigation efforts of other countries. The crucial difference is the possibility of transmitting information credibly through unilateral action.

In Jakob and Lessmann (2012) the nature of the public good (environmental quality) is known, but the players have different valuations for it and this valuation is private information. There is no incentive for players to reveal their own preferences truthfully. A player with a low preference for environmental quality could pretend to have a high valuation and thus induce a high contribution from other players. The only way of credibly conveying a signal is thus via an expensive action that would not be rational for a player with a low preference. When no international environmental agreement can be implemented due to asymmetric information, unilateral early action can signal the sender's type. Unilateral action is thus a means of credibly transmitting information to other countries.

The articles in this subsection resolve the issue of defining unilateral action (as raised by Hoel, 1991) through heterogeneous actors and an inherently dynamic game structure. For some actors it is thus the Nash strategy to take unilateral action.

4.2. Experimental evidence

The situation with an unknown quality of the public good as suggested by Hermalin (1998) and Andreoni (2006) has been tested experimentally. Potters, Sefton, and Vesterlund (2005) investigate the sequence of contributions to a public good when some contributors are informed about the value of the public good and others are not. They show that when the informed player moves first to make his contribution, the followers mimic the action of the leader. Anticipating the followers' actions, the leader chooses to contribute to the public good when it is efficient to do so.

Sections 3 and 4 give two separate reasons for a leadership effect. In Section 3, the leader appeals to the conditional willingness to cooperate in the followers. In Section 4 he transmits information to them in a credible way. Following Potters et al. (2005), there was an effort to distinguish these two effects. By comparing experiments with full information to those with asymmetric information, Potters, Sefton, and Vesterlund (2007), for example, find that the leadership effect is mainly driven by signalling.

In a sequential game (without leadership) Fischbacher and Gächter (2010) show that players in public good games use the contributions of other players to update their beliefs on their willingness to cooperate. The results of Glöckner et al. (2011) described above can also be understood as confirming the role of information transmission in leadership. When the contribution of the leader is not linked to a sacrifice the informational content of the action is lower.

Finally, some field evidence points to the role of the information content of previous donations. Soetevent (2005) compares contributions to charity in a church when they are collected in closed bags and open baskets. For external causes (where quality may be less known), the transparent way of collecting increases contributions, but there is no difference for internal causes. It can thus be concluded that donors infer the quality of the external charity from previous donations and adjust their contribution accordingly. Huck and Rasul (2011) find that lead donors (who might act as credibility devices) are a more effective way of eliciting donations than linear matching schemes.

4.3. Relevance for climate change mitigation policy

While the experimenter is a credible source of objective information in public good games, governments have to rely on their peers, who might not be fully trustworthy. Asymmetric information thus plays an important role in climate change mitigation. The Intergovernmental Panel on Climate Change (IPCC) provides widely accepted scientific evidence, but governments have private information on the priority they attach to climate change and on how large they judge the climate damage to be. Governments thus do not know how much other nations value climate change mitigation. The interaction of contributing is repeated and the quality of the public good can take a continuum of values. A signal on the importance of climate change mitigation is likely not to bring full information, but may reduce the degree of uncertainty substantially.

A leader on climate change could thus break an informational deadlock by signalling both his own high preference for mitigation and his knowledge about the value of it. Some governments may be better informed on the importance of climate change mitigation than others, for various reasons. They may have reliable information from domestic research institutions or it may be relatively high on the political agenda. A skeptical government may thus be convinced of the importance of mitigation once it observes others putting substantial effort into it.

Since the interaction of contributing to climate change mitigation is repeated, an effect of reputation building by the leader as in Hermalin (2007) would be possible. For this the leader would have to maintain his mitigation efforts consistently.

The ‘quality of the public good’ described in Vesterlund (2003) and Andreoni (2006) in the case of climate change would be the importance climate change has for future utility. This importance would be given as the utility from a future when mitigation is implemented versus the utility from a future without mitigation. This difference, in principle, can take any value. The effect described in Andreoni (2006) could therefore occur, where follower nations could suspect that a leader nation is sending a signal corresponding to a high importance of mitigation, even though it is only moderately important. The reason for this deception would be to lure followers into vigorous abatement, even though they would not do it if they were fully informed. To signal a high value of climate change, the leader would thus have to send a very convincing signal in the form of sizable mitigation within his own policy area.

Potters et al. (2005) provide some reassurance regarding how well a climate change mitigation signal of the leader would be understood. Participants in laboratory experiments seem to be well versed in understanding public good signals, even if uncertainty is only reduced and not eliminated. Governments can thus be expected to understand them all the more.

5. Research and development by the leader

Sections 3 and 4 have in common that the focus is on cooperation. In both cases it is assumed that there is the possibility to invest in a given public good and that in general it is provided inefficiently. Leadership could thus serve as a coordination device among conditional cooperators. This section describes ways for a leader to reduce the (expected) cost of climate change mitigation with the aim of improving the cost–benefit ratio for the followers. The aim of such a policy would be to move the cost–benefit ratio across a critical threshold so that followers start mitigating.

There are different ways in which a leader can gain and share knowledge that will facilitate the implementation of the public good. This knowledge provision can take three different forms. Section 5.1 considers policy. It may be unknown which policy is most effective in providing the public good. Section 5.2 considers the technology that is developed by the leader in response to the policy and which may allow followers to adapt very quickly to environmental policy. Section 5.3 looks at the information on the cost of achieving noticeable progress on the environmental objective.

The form of leadership explored in this section falls into the category of leading by example as in the previous sections, because the leader can only acquire the relevant knowledge by implementing climate change mitigation. The effects described here are similar to the Porter hypothesis in the sense that they work through the acquisition of knowledge. However, the Porter hypothesis works because the leader makes profits using his position as technology leader. In this section the leader is motivated by the prospects of more public good provision by the followers.

5.1. Policy diffusion

The relevance of policy diffusion for climate policy was succinctly expressed by Ostrom (2012): ‘Los Angeles took decades to implement pollution controls, but other cities, like Beijing, converted rapidly when they saw the benefits.’

Policy diffusion has been analysed in detail in political science. Dolowitz and Marsh (2000), for example, demonstrate the importance and scope of it. They attribute the growing importance of policy diffusion to countries' exposure to similar economic forces, to the rapid growth in communications, and to the influence of international organizations. They then expand the framework developed in Dolowitz and Marsh (1996) to analyse the process of policy transfer. An important aspect is from where governments learn policies. Although learning between national governments is an important aspect, it also occurs in all possible combinations of international, national, and local levels. Policy transfer can also vary in degree, from directly copying a policy to abstract inspiration. It can also vary between voluntary and coerced transfer.

Following this description of the conceptual framework of policy diffusion, quantitative empirical analyses added further insights into the patterns of policy diffusion. Using one specific policy in US states, Volden (2006) finds that successful policies are copied by other states more often than failing policies. Following up on this with a paper on policy diffusion between US cities over 25 years, Shipan and Volden (2008) find that cities learn policies from early adopters. In addition, it turns out that larger cities drive the process of policy innovation and smaller ones are more likely to follow. Gilardi (2010) adds that learning can be driven both by the policy outcome and by political results such as reelection prospects.

The empirical analysis of policy convergence has also been applied to environmental policy. Holzinger, Knill, and Sommerer (2008, 2011) perform empirical studies on 24 industrialized countries between 1970 and 2000 and find strong convergence. Looking at the mechanisms behind the convergence, they find that this development is caused mainly by international harmonization and transnational communication. Gouldson, Carpenter, and Afionis (2014) and Matisoff and Edwards (2014) are recent examples of studies finding convergence in environmental policy, but also of constraints on it such as political culture.

Focusing directly on climate policy, the EU ETS is a prominent example of policy diffusion. It was itself largely inspired by the US sulphur dioxide trading system (Kruger, Oates, & Pizer, 2007). Since its implementation in 2005, emissions trading schemes had spread to a further 17 jurisdictions by 2014, with more planned (Kossoy et al., 2014). There has been no quantitative study of the learning effect triggered by the EU ETS, but Betsill and Hoffmann (2011) give some anecdotal evidence. Australia, for example, is reported to have learned successfully from the EU ETS. Paterson, Hoffmann, Betsill, and Bernstein (2014) analyse the network of academics and policy makers through which countries learned about emission trading.

5.2. Technology

Technology diffusion has been investigated in great detail. One example is the work of Eaton and Kortum (1999), who find international technology diffusion to be quite powerful, as foreign innovations are two-thirds as effective as domestic innovations. They conclude from this that the US and Japan drive growth in other countries to a large extent. Acemoglu and Zilibotti (2001) and Keller (2004) provide further empirical details on the diffusion process. Benhabib and Spiegel (2005) and Popp, Newell, and Jaffe (2010) give overviews in handbook articles. How do these general observations apply to emission efficient technology?

Popp (2006) investigates the effect of environmental regulation on the domestic economy as well as spillover effects to other countries. They use regulation for nitrogen dioxide (NOx), for which Germany and Japan introduced stringent regulation early, and sulphur dioxide (SO2), for which the US was a regulation leader. This setup controls for the possibility that one country leads on environmental technology, independent of regulation. Environmental regulatory pressure accelerated the corresponding environmentally friendly technology. Technology diffusion can be found in the form of foreign patents, which play an important role as soon as a country follows up on regulation.

Lovely and Popp (2011) go one step further and directly consider the effect of regulation in one country through the development of technology on regulation in another country. Descriptively, they find that regulation on NOx and SO2 is introduced later in countries with lower gross domestic product (GDP), but at an earlier stage in development. By using the role of trade as a transmission channel for technology, they show econometrically that technology increases the likelihood of adopting environmental regulation. Gerlagh and Kuik (2014) shows, in a numerical model, how this could apply to CO2.

There is also evidence on the diffusion of specific low-carbon technologies. Technology transfer has played a very important role for the emergence of wind turbine manufacturers in India and China (Lewis, 2007; Zhang, Chang, Huo, & Wang, 2009; Wang, 2010) as well as for very advanced photovoltaic technology in China (De La Tour, Glachant, & Ménière, 2011).

5.3. Cost

As seen in Section 4.1, Brandt (2004) describes the effect of leadership in communicating information on costs between governments. In this subsection we consider the case where no government has precise information on cost. Leadership then has the effect of exploring this unknown cost with the intention of making it available to others.

The costs involved in introducing new regulation are often difficult to estimate. Harrington, Morgenstern, and Nelson (2000) empirically show, by comparing cost estimates before a policy is implemented with assessments of actual costs afterwards, that in the majority of cases ex ante estimates are too high. A major source for errors in cost estimates are technological innovations that were not anticipated at the time the regulation was introduced.

Elofsson (2007) uses a model with uncertainty over abatement cost. In this case there are two risk-averse countries with uncertain, but correlated costs of abatement. By taking the lead one country can reduce the risk premium to followers. The level of uncertainty differs so that countries with low uncertainty are the natural candidates for taking unilateral action.

5.4. Relevance for climate change mitigation policy

The above sections identify three areas where the acquisition of knowledge by the leader spills over to other countries. These spillovers improve the cost–benefit ratio for potential followers. If they have some preference for mitigating climate change, even if it is weak, this improved cost–benefit ratio will eventually activate them into taking action.

In the case of the EU ETS, the importance of policy learning is evident. The policy is of great importance for climate change mitigation, and it turns out that the European example has helped in avoiding certain problems in other jurisdictions from the start. Examples in Dolowitz and Marsh (2000) show that learning occurs between levels of government, so it can be expected that (sub)national experiences could contribute to the design of a global ETS. The results of Shipan and Volden (2008) indicate that large countries will typically be expected to lead the way.

There is ample evidence that technology diffusion also works for environmental technology. Further improvements in climate policy could promote low-carbon technology in the regulating jurisdiction and serve as an advanced starting point for later regulators as in Popp (2006). This will make the adoption of climate policy cheaper in other jurisdictions, so they might be more willing to adopt the regulation, as in Lovely and Popp (2011). That these results obtained for local pollutants could also apply to climate mitigation is strongly suggested by the international transfer of low-carbon technology as in De La Tour et al. (2011).

Finally, the theoretical models in Brandt (2004) and Elofsson (2007) suggest that the leader would also probably provide more accurate information on implementing climate change mitigation. Harrington et al. (2000) have shown that underestimating technological adaptation is one cause for overestimating policy cost, so the development of technology and the increased precision in estimating policy costs could interact to let potential followers make a downward correction of their own cost estimates.

6. Conclusion

This article assembles three categories of possible mechanisms that could trigger a positive reaction from followers once a country or region has taken the lead on climate policy. A leader's unilateral introduction of substantial climate change mitigation could elicit the introduction of similar policies elsewhere out of a desire to contribute a fair share to the global public good. It might signal crucially needed information on the preference for a minimization of climate change and the value of this public good. It could provide a valuable service in the form of knowledge that makes mitigation more attractive to followers. This knowledge might take the form of information on policy costs, successful policy design, and technology. The literature provides theoretical models as well as empirical evidence for all these effects.

The article also offers a new perspective on EU leadership in climate change mitigation. The EU has carried out pioneering work on climate policy and has made pledges on future emissions reductions, but has failed to achieve an outstanding amount of actual emission reductions so far. This lack of a noteworthy contribution to the public good of climate change mitigation could explain why the policy has not yet had a coordination or signalling effect in the sense of Sections 3 and 4. By contrast, EU policy does provide valuable knowledge in the sense of Section 5 in terms of policy experience, sustainable technology, and less uncertainty on policy cost. This, however, might take more time to have a major impact. Finally, achieving a global agreement in the short term does not need to be the only measure of success. As Ostrom (2012) puts it, ‘a variety of overlapping policies at city, subnational, national, and international levels is more likely to succeed than are single, overarching binding agreements'.

Almost all of the articles considered here use static models, with a single leadership contribution and follower reaction. The problem of climate change, however, must be solved in a long-term repeated interaction, so that dynamic analysis will deepen the understanding of the leadership potential. It would be useful to investigate whether repeated leadership contributions can tip the balance towards a situation that would eventually allow for a global agreement on emission reductions. Another approach to improve the understanding of leadership would be to identify at which of the points described above leadership is most needed. In addition, the importance of policy spillovers for climate policy could be better understood with a systematic analysis of how other jurisdictions learned from the EU Emissions Trading Scheme experience.

Acknowledgements

This work was supported by the German Federal Ministry of Education and Research (BMBF) in the Call ‘Ökonomie des Klimawandels’ (funding code 01LA1105A CLIPON). I thank Jérôme Hilaire, Michael Pahle, participants of the workshop ‘Towards a New Climate Politics’ at Zeppelin University, Friedrichshafen, for helpful discussions, and three anonymous reviewers for valuable comments.

Notes

1. See Section 3 for a discussion of the generalization of laboratory experiments to government decision making.

2. From the start of the EU ETS in 2005 until 2010, total CO2 emissions in the EU reduced by 8.3%. This is not outstanding compared to reductions in other industrialized economies like Switzerland (−6.3%), Japan (−5.4%), the US (−6.8%), and Canada (−11.4%) (data source: World Development Indicators, World Bank).

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