OECD Inventory of Support Measures for Fossil Fuels: Country Notes

Iceland

Energy resources and market structure

Iceland is unique among OECD countries, as 89% of its total energy supply and almost 100% of its electricity are obtained from renewable-energy sources. The country produces no fossil fuels and imports all of its petroleum products, which are mostly consumed in the transport and fishing sectors.

Iceland converted from oil to geothermal district heating between 1940 and 1975. Today, 97% of heating output comes from geothermal sources and most of the rest is provided by electricity.

 

Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).

Private companies supply Iceland with petroleum products while publicly-owned companies dominate the rest of the country’s energy economy. Landsvirkjun (the National Power Company), the nation’s largest electricity producer, is fully owned by the Icelandic State since 2007. The company, which also owns the majority of the national grid, sells its generated power as wholesale to local utilities and directly to power-intensive industries. Another municipally owned company, Reykjavík Energy, through its subsidiaries, provides hot water to half of Iceland’s population, and also generates electricity from geothermal steam. Privately-owned HS Orka, the third main energy firm in Iceland, operates two geothermal power plants and distributes electricity nationwide.

Iceland’s annual per-capita electricity consumption is the highest in the world, standing at about 52.68 MWh per person in 2021. More than 85% of it is consumed by the industrial sector, mainly in aluminium-smelting.

Energy prices and taxes

Energy prices in Iceland, except for petroleum products, are set by the energy companies. Electricity for the general public is sold by licensed traders which in turn purchase their power from generating companies (Landsvirkjun or from their own if they are auto producers) on fixed contracts. Electricity contracts for power-intensive projects are concluded on a long-term basis.

Petroleum fuels used for transport are taxed both directly and indirectly through several taxes. All motor fuels used by road vehicles are subject to a general excise tax, a supplementary road tax for transport fuels, a carbon tax, as well as the standard 24% VAT rate. Transport fuels used in aircraft are exempted from excise taxes.

Iceland’s carbon tax, introduced in 2010, covers four categories of fuels: gas diesel oil, motor gasoline, heavy fuel oil and LPG. Fuels used by the fishing fleet are fully subject to the carbon tax and VAT, and to no other forms of taxation.

Also introduced in 2010 was an energy tax collected on the sales of electricity and hot water which has since been reduced to cover only hot water sales since 2016. In 2020, the tax on fluorinated gases was implemented. A recurrent weight charge is also applied to heavy road vehicles.

Recent developments and trends in support

Motor vehicles are charged an excise duty at the port of import. Starting in January 2011, the ad-valorem excise duty levied on motor vehicles for private use or tourist services started to be based on a vehicle’s CO2 emissions, with rates ranging from 0% for vehicles emitting between 0 and 74 grams of CO2 per km, to 65% for vehicles emitting 250 grams or more according to New European Driving Cycle. Reduced rates are levied on vehicles intended for use as taxis and for cars that are capable of being partially fuelled by methane. Since the 2011 reform, the recurrent tax on motor vehicles has been calculated based on CO2 emissions. Exemptions apply for automobiles used by disabled persons, rescue services and for cars older than 25 years.

Motor fuels consumed for off-road uses and diesel used for space heating or in stationary engines are exempt from the road tax. Additionally, liquefied petroleum gas (LPG), as well as compressed natural gas and aviation fuel, are exempt from the excise tax.

A reduced VAT rate of 11% is levied to residential space heating and swimming pools irrespective of energy source (e.g. geothermal, electricity, fuel oil). Passenger transport services and highway tolls are also subject to the reduced VAT rate.

To reduce the high cost of space heating for households in remote rural areas where geothermal heating is currently unavailable, households may apply for financial support from the government. This budget expenditure item amounts to 0.07% of the country’s GDP. Research efforts to increase the access and consequently share of geothermal energy in space heating in rural Icelandic communities continue.

Table 1. Description of measures

Lower VAT Rate on Oil for Space Heating	A reduced rate of VAT (11%) applies to oil used for space heating and swimming pools in Iceland. Most sales of goods and services are, however, subject to the standard 24% rate.
Exemption of Petroleum used in Aircraft from Excise Tax	Petroleum that will be used and has been proven to be used in aircrafts shall be fully exempted from excise tax.

Data sources

Country data in OECD.stat

OECD Fossil Fuel Support Portal

National data sources

Note on the Methodology

Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.

The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.