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2021 OECD Economic Surveys: Iceland 2021

image of OECD Economic Surveys: Iceland 2021

Iceland’s economy is recovering from a deep COVID-19 recession. Fisheries and intellectual services exports are on the rise and foreign tourists are starting to come back as travel restrictions are gradually eased. The health crisis has been relatively mild so far, thanks to a smart testing and tracking strategy and a well-functioning health system. After a sharp rise during the pandemic, unemployment is declining fast, and inflation hovers above target. Appropriate macroeconomic policy coupled with structural reforms are needed for a sound recovery and sustainable growth. The central bank should remain vigilant and fiscal support should continue to target vulnerable groups. Reducing stringent regulation, especially in tourism and construction, would help shift resources to more productive firms and jobs. Strengthening vocational education and training, and linking part of university funding to labour market outcomes would reduce labour shortages and skills mismatch. Offering better-targeted support for business R&D, encouraging the adoption of digital technologies and facilitating knowledge transfer would boost innovation and productivity. Submitting all economic sectors to carbon pricing – either a carbon tax or an emission trading system – while redistributing the proceeds to households and firms will be key for a cost-efficient and equitable transition to a low-carbon economy.

SPECIAL FEATURES: INNOVATION; CLIMATE CHANGE

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Addressing climate change

Iceland relies far more on renewable geothermal and hydropower energy than any other OECD country. Even so, the country’s per capita carbon (or greenhouse gas) emissions remain above the OECD average, partly because of emission-intensive aluminium smeltering. The government committed to reduce emissions from their 2005 level by 40% by 2030 and in 2020 updated its climate action plan covering 48 individual policy measures. This chapter presents a policy framework to reach the climate targets in a sustainable, cost-efficient and inclusive way. Climate action should first and foremost rely on comprehensive carbon pricing, via a carbon tax or an emission trading system. All sectors and carbon emission sources should be covered, and the government should commit to a gradual increase of the carbon tax rate. The government should support innovation and investment in green infrastructure, particularly in carbon capture technology, low-carbon fishing vessels and soil conservation. To ease the transition to a low-carbon economy, Iceland should remove entry barriers for new and innovative firms, foster the creation of green jobs, and invest in adequate skills. To garner political support, proceeds from carbon pricing could be redistributed to households and firms, at least partly.

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