Iceland

Iceland’s economy has demonstrated robust growth over the past decade, having rebounded after a severe financial crash in 2008. Growth in recent years has been among the highest in Organisation for Economic Co-operation and Development member countries. Iceland’s economy is very dependent on natural resources and open trade, underpinned by a few export sectors.

Traditionally, fisheries were the most important sector, having provided Iceland with a ticket from poverty to an advanced welfare society. For much of the 20th century, fish and seafood accounted for 70–90% of exports of goods. In recent decades, however, Iceland’s economy has diversified. Today, fish products account for some 40% of exports of goods, and only 20% of exports of goods and services combined, when income from tourist expenditure in Iceland is taken into account.

The biggest economic development in recent years has been a rapid expansion of tourism. Iceland received over 2.2 million visitors in 2023, a more than fourfold increase since 2010. There was a large expansion in heavy industry around and after the turn of the century, utilising Iceland’s abundant renewable energy. Iceland is the biggest electricity producer per capita in the world, at around 50 MWh/year, compared with 6 MWh/year in the EU. This is reflected in the fact that energy poverty is almost non-existent in Iceland. Almost all electricity is produced by renewables, hydropower and geothermal, and approximately 80% of electricity consumption is accounted for by heavy industry.

Inequality is relatively low in Iceland in comparison with other European countries. In 2022, the Gini coefficient in Iceland was 24.2, whereas the average Gini coefficient among EU Member States stood at 29.6. Likewise, Iceland had in the same year the lowest inequality among the Nordic countries.

In recent years, economic growth has contributed to social changes in Iceland, including significant immigration, to cover labour shortages, contributing to an increase in population. Consumption levels are high, posing challenges to establishing a circular economy. Recent reforms in waste collection and management appear to be yielding results, with increased recycling of organic waste and lower carbon emissions. Public expenditures for climate and environmental protection have increased in recent years, including for infrastructure for electric cars, afforestation, revegetation and nature conservation.

The food system

A 2023–2040 national food strategy and a new 2023–2040 agricultural policy were issued as parliamentary resolutions in 2023. As a follow-up, action plans for both the food strategy and the agricultural policy were issued in 2024, both aiming at reducing Iceland’s GHG emissions and carbon footprint in food production.

Food production in Iceland relies primarily on agriculture, fishing and aquaculture. Horticulture supplies approximately 43% of the country’s vegetables, while livestock farming meets around 90% of the demand for meat, 96% for eggs and 99% for dairy products. Despite the potential for greater production, domestic grain cultivation accounts for only 1% of total grain consumption.

Fishing and aquaculture fulfil Iceland’s domestic fish consumption and produce a surplus, making fish a significant export. Iceland remains reliant on imports for many essential food items, such as cereals and fruits. In addition, Icelandic food production heavily depends on imported resources, including fuel, fertilisers, feed and seeds.

Iceland’s national dietary guidelines emphasise a shift towards a more plant-based diet, encouraging higher consumption of vegetables, fruits, berries, pulses, nuts and whole grains. At the same time, the guidelines recommend reducing the intake of red meat and minimising the consumption of processed meat and other highly processed foods that are high in added fats, salt and sugar. However, results from the national dietary survey conducted between 2019 and 2021 show that Iceland is still far from effectively addressing these recommendations.

The mean level of dietary GHG emissions in Iceland is high, at 6.3 kg CO₂eq/day, based on the national dietary surveyand the Life Cycle Assessment food database from Denmark. Seven out of ten Icelanders actively strive to minimise food waste, and an increasing number of businesses are emerging with the aim of reducing it. Many innovative companies have been established, some leveraging digital solutions (e.g. Humble, Greenbites), while others focus on fully utilising products (e.g. Kerecis). At the same time, larger companies are transforming their processes to reduce waste. The fisheries sector, for instance, places strong emphasis on maximising resource utilisation, using 99.7% of all products generated.

Since 2020, the government has run a pilot programme for climate-smart agriculture. Farmers participating in the programme learn about emissions resulting from their farming practices and receive advice on how to best reduce the emissions. The programme has been successful in generating valuable experience with regard to the effectiveness of different actions to reduce agricultural emissions.

Sustainable land use is a fundamental goal in all policies for food production. The production of certified carbon units through land use is increasing, particularly through increased forestry. Farmers have, for decades, been able to receive support for restoring degraded lands, resulting in more sustainable and more climate-friendly land use.

The energy system

Iceland is the largest electricity producer per capita worldwide, with nearly 100% of its electricity renewable, mainly hydropower and geothermal. Likewise, about 90% of the energy used for domestic heating in Iceland comes from geothermal energy.

Social and behavioural changes are focused on energy conservation and sustainability. The introduction of smart metering technologies and demand response programmes is fostering better energy management, encouraging energy-intensive users to balance their load. Public acceptance of energy projects, however, remains a challenge. Balancing environmental protection with rising energy demand is contentious, especially for large-scale energy infrastructure projects. Public support, along with stakeholder cooperation, is critical for the success of these projects.

Technological innovations, including expanding wind, geothermal and hydroelectric energy sources, have a significant impact on Iceland’s energy system. The integration of renewable energy hinges on developing a robust transmission grid to efficiently distribute power from remote areas. However, agreements with landowners and local municipalities often cause delays. Smart grid technologies are also being implemented to improve flexibility and resilience, for example in response to recent natural events like volcanic eruptions, which tested Iceland’s energy infrastructure. Iceland is also investing in upgrading its existing energy infrastructure to accommodate electric transport fleets, an essential part of the energy transition.

Economically, the focus is on improving financial viability through better resource allocation, given inflation and the rising costs of materials. Capital grants and international funding play an important role in supporting the transition. New economic incentives, such as transparent grid use policies and market-based signals, aim to ensure equal access and improve efficiency. However, capital costs, inflation and material price surges remain significant uncertainties, making financial planning crucial for new investments.

Iceland’s energy policies are shaped by global climate targets and renewable energy commitments. The country’s participation in international organisations, such as the World Energy Council and Nordic Co-operation, promotes collaboration and knowledge sharing. Domestically, recent political initiatives have focused on upgrading energy infrastructure to meet renewable energy targets and improve system resilience. However, approval processes for infrastructure projects can face delays due to local opposition, particularly concerning transmission grid expansions.

Overall, Iceland is navigating a complex energy landscape, where public support, technological innovation, economic incentives and political frameworks all play pivotal roles. Through collaboration, transparency and strategic planning, Iceland aims to continue its energy transition while balancing environmental sustainability with economic and energy security.

The mobility system

Iceland, being a sparsely populated island, has a mobility system mainly powered by imported fossil fuels. With a population of ca 400 000 people, a harsh climate and a weak public transport system, the private car has for many been seen as the only viable mode of transport.

In 2018, Iceland’s climate action plan emphasised a rapid clean energy transition in transport by strengthening tax incentives for clean fuel vehicles and supporting infrastructure for green transport. The energy fund has consistently been strengthened for the purpose of the support of infrastructure for electric vehicles. Alternative fuel production and corresponding equipment (heavy transport and public busses) have also been funded. These efforts led to a rapid increase in sales of electric cars in Iceland, and, in 2019, Iceland ranked second worldwide in new sales of electric vehicles per capita, after Norway. In 2023, over 70% of new registrations by households were electric vehicles. Indications show that this proportion has dropped somewhat since, partly due to a general drop in car sales, as well as incentive changes. Despite the sharp increase in household purchases of zero-emission cars, these vehicles accounted for only 16% of new car rental vehicles in 2023, which amounts to nearly half of all new car registrations. The Energy Authority forecast for 2024–2050 indicates that only 28% of all cars and only 30% of all passenger cars will be clean energy vehicles in 2030, despite plans to ban new registrations of fossil fuel vehicles after 2030. Furthermore, the updated climate action plan includes implementing a ban on fossil fuel trucks and buses from 2035.

The number of people using bicycles and other micromobility alternatives (e.g. electric scooter and mopeds) as their main mean of transport has increased in the past years, especially in the capital area, where around 65% of the Icelandic population lives. In 2011, 4% of trips in Reykjavík were made by bicycle, whereas, in 2019, this number had risen to 7%. Bicycle and scooter retailers saw a large increase in sales after financial incentives were introduced in 2020, strengthening the trend further. This development coincided with the extensive development of cycling and walking paths in the capital area.

The largest of five ferries in Iceland is powered by electricity. Despite steep increase in bus use for the past years (7% in 2021, 17% in 2022 and 13,4% in 2023) only 8% of residents in the capital area use public transport on a regular basis. However, a recent transport pact between the government and the municipalities in the capital area includes building a new CityLine public transport system as well as constructing new walking and cycling paths. The main goals are to offer inhabitants cheap transport options and diverse modes of travel; support the government’s aim of a sustainable, carbon-free urban society; improve infrastructure for other environmentally friendly means of transport; and encourage changes in travel habits.