How do I use shaders and effects to achieve this?

I want to achieve something similar to this game has. The way the lights are and how they effect whats around them.

I have tried using glow on objects and destination out to create lights but it doesn't look good.

From that video it looks like you can probably do this with blend modes for objects/layers. There's actually a ready example in C2 you can have a look at, just go to File > New > Example: Lighting

Thanks.

One of the things I missed was using a sprite that didn't already have a glow around it.

Will this work for other colors besides white?

On that I'm not 100% sure, I think may just default to white. Perhaps you can use additional translucent objects and layers to give things a colored tint?