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This paper examines leadership in relation to supplying a global public good. Both the Kyoto Protocol and the Paris Agreement encourage the developed countries to take a lead in reducing emissions. Does a country benefit from taking a lead? When does leadership improve global welfare? The answer depends on how transparent the leader’s abatement technology is for the followers. When there is no transparency and the leader has to abate to signal the abatement cost, leadership reduces global welfare unless the crowding-out effect is weak. If there is transparency and the follower can benefit from technology spillover effects, leadership reduces global welfare unless the spillover effect is sufficiently large. I find that transparency reduces global welfare unless the spillover effect is sufficiently large and the difference in abatement cost is small. This theory can rationalize the European Union’s stance on climate policy while also explaining the perceived failure of the Kyoto Protocol.

Finland introduced the planet's first carbon tax in 1990 to experiment with, to most economists, the best policy to reverse carbon emissions. I estimate the causal effect of taxing carbon on Finnish emissions using the Synthetic Control Approach (Abadie, 2021). The results suggest that taxing carbon reduces emissions by big margins. Finnish emissions are 16% lower in 1995, 25% lower in 2000, and 30% lower in 2004 than emissions in the counterfactual consistent with carbon taxes whose value increasing by 20 fold in 1990 - 2005. The estimates suggest that the carbon tax's abatement elasticity is about 9%.

I examine a policy-making game among countries that must choose both a policy instrument (e.g., a tax or a quota) and its intensity (i.e., the tax rate or the quota level) to price pollution. When countries price pollution non-cooperatively, they not only set the intensity inefficiently, they are also likely to adopt Pigouvian fees, despite quotas being better from a welfare perspective. Adopting a Pigouvian fee to address a multi-country externality generates a risk externality, and non-cooperatively chosen quotas can generate higher social welfare than maximum social welfare Pigouvian fees can deliver.