It was in Germany that Ed Regan realized Gainesville, Florida, was going about things all wrong. The assistant manager at Gainesville Regional Utility (GRU) was out looking for ways to boost his city's renewable energy capacity. "Germany was a game-changer," Regan says. Wind turbines and solar panels seemed to be everywhere. He soon learned the secret.

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The difference between Gainesville and Germany was that Germany had a national feed-in tariff.

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So this past March, Gainesville rolled out its own feed-in tariff. GRU now pays twice the retail cost for every kilowatt of solar power-generated electricity. The extra cost means a small increase in electrical bills for all utility consumers, less than a dollar per month per household.

But in order to keep consumer prices down, the feed-in tariff is limited to expand by only 4 megawatts of solar photovoltaic capacity per year, for six years. And the first year's quota was snapped up in just two weeks. The program now has a waiting list through 2016. Rather than a bunch of homeowners each installing a few panels, the Gainesville quotas were mostly taken by commercial investors.

You see the pattern. This reminds me of one of the more powerful arguments made in the grand 'tax or trade' debate on how to curb greenhouse gas emissions through market mechanisms.

Limiting emissions creates a scarcity where none previously existed; it is a rent-creating program. The dangers of quantity approaches compared with price approaches have been demonstrated frequently when quotas have been compared with tariffs in international trade interventions.

Rents lead to rent-seeking behaviour.

W.D. Nordhaus - A Question of Balance

This is an object lesson in why not every statement made by neoclassical economists is wrong. One of the key strengths of the German scheme compared with capped feed-in tariffs or various certificate or tax credit programmes is that it is a price approach that does not create artificial scarcity. This curtails the scope for abuse and makes the scheme inclusive, increasing the social acceptance of installing renewable energy. The NIMBY movement, for instance, is far weaker in Germany than it is in the UK, where local councils have become loath to approve wind energy projects.

If the lesson is not to put a cap on this type of scheme, the question remains how any smaller type of local or regional government can implement it successfully while keeping the cost affordable. In principle feed-in tariffs are better implemented on a larger scale - for the US at least at the state level. A local government will have to do considerable market analysis and cost discovery to set the price right. If the local government feels it has to set a cap, the only practical option is to cut back eligibility to local people and businesses and to restrict the title.