Iceland’s lifeline: Transport is a national security matter

In early August 2020 I packed my life into two large suitcases and moved to the United States. I was going there to study, but the timing was odd, with travel restrictions in force across most of the world. I even had to get married in secret so that my wife would be able to visit me over the winter.

Boarding the plane was a remarkable experience. First, there were at most five of us passengers on a large Boeing 767 wide-body (seven seats to a row and two aisles). Second, I will always remember the smell of fish that filled the cabin, something I could not recall ever having noticed before.

Then it dawned on me that the other passengers and I were incidental to this flight. The fish with its fine aroma was the point: it had to reach its market, and it needed the big jet. But this was also the only flight to the United States that day. We Icelanders had gone from enjoying more international air connections than any other country (per capita, of course) to one flight east and one flight west.

The experience was a reminder of how quickly things can change and, just as much, of how important international connections and transport are for a small island state in the North Atlantic. Being able to travel to and from the country is a matter of security as much as a luxury, and being able to bring goods into the country is a matter of survival. Transport is a cornerstone of economic security, and of national security in the wider sense.

In 2020, once an emergency had set in, the government caught on and contracted a minimum level of flights to and from the country. In normal times, however, no one has the job of safeguarding these connections. They rest on companies that must hold their own in international competition, and those companies are now being squeezed from three directions at once. Iceland’s National Security Policy, last revised in 2023, mentions neither transport nor logistics, although it covers a range of other subjects. This gap must be closed in the next revision of the policy, no later than 2028, so that government decisions on charges, regulation and international commitments are assessed for their cost to Iceland’s connectivity with the rest of the world.

The world of yesterday?

In the twentieth century there was a strong understanding of the importance of international transport. The shipping company Eimskip, to take one example, was known as “the nation’s promised child”. Icelanders then perhaps remembered better than now that one reason we submitted to the Norwegian king in 1262 was that we had failed to secure transport to and from the country. In the Old Covenant (Gamli sáttmáli), the king committed to six ship voyages to Iceland each year. The same attitude held, in essence, for aviation, a new technology that offered other ways to connect Iceland with the outside world.

Icelanders managed to turn their distance from the continents to the east and west into one of their main strengths, and a genuine transport hub emerged here, both in the air and at sea.

A hub of this kind is more fragile than it looks. Companies generally build integrated route networks. These networks have economies of scale: a new destination brings added volume, which can in turn strengthen existing destinations. The same works in reverse. If a network is weakened by systematically heavier charges on its hub, it may eventually have to shrink significantly to adapt to the new reality. For an island state, a smaller network means fewer connections, less cargo capacity and less ability to respond when it counts.

As the networks have grown, I wonder whether we have become too accustomed to our strong position in these sectors and have started to neglect threats on the horizon. Strong transport requires infrastructure, and we are now in debt: an infrastructure debt. But strong transport also requires strong companies operating under competitive conditions. Icelandic transport and logistics companies are still in a strong position, yet their competitiveness has eroded in several respects in recent years.

Squeezed from three directions

The problem takes three forms. Two are homegrown and share a common theme: extracting as much as possible from the companies that provide Iceland with its international connections. The third comes from abroad and is of a different nature. In none of these cases, however, does anyone ask what the decision means for the country’s connections with the outside world.

The pattern shows when small occupational groups in these sectors are unwilling to follow the wage norm set by the collective agreements of the umbrella organisations on the private labour market, and instead reserve the right to come to the table afterwards and secure larger increases than others receive.

The problem also shows in the charges and complex regulation that the government imposes on companies in this field. Varða, the think tank that publishes this magazine, has among other things pointed out that not a single merchant ship is on the Icelandic ship register. All goods that reach Iceland by sea travel on ships over which Iceland has very limited jurisdiction in practice. In an emergency, other states would therefore hold jurisdiction over the ships that normally serve Iceland. This state of affairs has come about because the Icelandic government has not offered a competitive option for ships in international trade. Competition in international shipping is fierce, and the rules and regulations of the flag state can decide whether a company stays competitive against rivals from other countries.

The situation in the aviation industry is not as dire. Even so, industry veterans have repeatedly said publicly that it would be more economical to move air operator certificates abroad, for example to Malta, where operating conditions are more favourable. This problem will not be solved by decree, but by the government concentrating on creating better operating conditions in Iceland.

Yet another expression of the problem is Iceland’s burdensome international commitments in transport, which keep growing. More often than not they relate to the environment. In itself, it is not a bad thing for the world’s states to come together and run international or regional schemes to tackle climate change or other environmental issues. In principle that is preferable to each country designing its own regime. The problem is that these regimes are often designed without regard to Iceland’s particular circumstances. They take no account of the country’s small population or its geographic location.

Just as every unhappy family is said to be unhappy in its own way, every ill-suited international or regional climate levy scheme is ill-suited to Iceland in its own way. Broadly, such schemes fall into two groups: those that charge per unit of emissions, such as a tonne of CO₂, and those based on emissions intensity, that is, emissions per unit of, for example, weight or distance.

One regime stands out as suiting Iceland reasonably well: CORSIA, run by the International Civil Aviation Organization (ICAO). It has the merit of being realistic, it rests on global participation, and it belongs to the first type: operators pay for each tonne of emissions above a set baseline. If CORSIA stood alone, Iceland would not be in a bad position. Matters are complicated by the fact that the European Union has designed its own scheme, which is regional and largely sits on top of CORSIA. This is the EU Emissions Trading System (ETS).

The regional nature of the ETS is particularly hard on aviation through Iceland, because Iceland sits on the edge of its geographic scope. Flights within the European Economic Area (EEA), that is, between Iceland and Europe, bear ETS charges, but flights departing the EEA do not. As a result, a direct flight from Frankfurt to Boston bears no ETS charges, while a flight from Frankfurt to Boston via Keflavík Airport bears heavy charges on about 40% of the route. This seriously distorts the competitive position of airlines flying through Iceland. It is also worth noting that the ETS weighs more heavily on travel between Europe and Iceland in general, because the distances are much longer than is usual on the European mainland and there are no real alternatives to flying. Distance and isolation from the mainland have been recognised as grounds for special rules at EU level. Specific rules apply to the outermost regions, remote territories of certain EU member states such as the Canary Islands. Iceland’s particular position, however, has not been viewed in the same light.

The ETS also applies to shipping. The same basic effects hold, though to a lesser degree, because only 50% of emissions on voyages to or from ports outside the EEA are covered, compared with 100% on voyages within the EEA. The ETS nevertheless distorts competition in shipping across the ocean. On top of this, the EU has introduced emissions-intensity targets and penalties for ships that fail to meet them. These targets take no account of the weather and sea conditions in the North Atlantic, although other conditions, such as navigation in ice, have in some cases been taken into account. Put simply, worse weather generally means more fuel to sail a given distance. DNV carried out an analysis of shipping energy use for the Icelandic government and estimated the additional energy use due to wind and waves for cargo ships sailing to Iceland at about 17%, compared with about 9% on comparable routes within Europe. That may sound like a small difference, but when penalties are charged on everything above the target, every percentage point counts. A further analysis by the same firm for the Confederation of Icelandic Enterprise (SA) and the Federation of Trade and Services (SVÞ) found that ETS costs on the Reykjavík–Rotterdam route are at least 50% higher than on comparable routes within Europe.

No global scheme for emissions from international shipping has yet been adopted, but the International Maritime Organization (IMO) is working on a new framework, the IMO Net-Zero Framework. According to the current draft, it rests in part on a similar basis to the EU rules and could hit Iceland proportionally hard because of its location and long shipping routes.

If the reader lost the thread anywhere in this article, it was most likely in the preceding paragraphs. The regulatory alphabet soup now facing transport and logistics companies is impenetrable, to say the least. Yet the overview shows how complex, layered and difficult the operating environment in this sector is becoming.

Indeed, it is hard to describe this vast body of international and regional regulation, in its current form, as anything other than a threat to Iceland’s economic security. This is all the more so because most imports and exports are affected by the extra charges that land on Icelandic transport and logistics companies.

What can be done?

The challenges described above do, however, share one redeeming feature: they are of our own making, not the result of forces beyond our control. If transport and logistics are a matter of national security, then policy choices can equally strengthen the foundations of Iceland’s connectivity. Several tasks follow from this.

First, much would be gained by reforming the collective bargaining model, including changes that ensure small occupational groups with a hold over nationally critical infrastructure cannot use that position to secure larger pay increases than the norm in a bargaining round. Ideally, the government, employers and unions would agree to review the bargaining model and the framework around the office of the State Mediator (ríkissáttasemjari) to prevent overruns of this kind. In any event, the situation cannot be allowed to continue much longer.

Second, the government must find ways to reduce the fiscal burden on the sector and simplify its regulation. The obvious starting point is to ensure that Icelandic-owned ships can be registered on an Icelandic register that offers competitive operating conditions. Successive governments have raised the issue over the past two decades but never seen it through. It is time they did.

The international dimension is more complex. Here, Iceland is one part of a larger system in which many parties must find common ground. Securing recognition of Iceland’s specific circumstances should nonetheless be achievable.

Progress has been made in securing a temporary adjustment for aviation under the ETS, although it solves only part of the problem, and only for a time. Agreement on a temporary adjustment was first reached in 2023, and the European Commission’s proposal for revising the ETS, presented in summer 2026, provides for extending the adjustment by three years. Political leadership and good cooperation between government and industry were decisive in securing what has been achieved. A working group spanning the ministries involved was set up under the leadership of the Ministry for Foreign Affairs. Its members had a clear mandate to analyse possible solutions together with stakeholders, align messaging with the industry and get the message across. Notes were compared after meetings in Brussels, and a joint effort was made to touch base with everyone there who had any part of the file on their desk. Advocacy works best when the issue is made a political priority. The civil service then has a clear mandate to advance it and to work closely with industry. This result is far from a complete victory, but it is an important milestone. It must be built on, and a more permanent solution that tackles the underlying competitive distortion in the ETS must be pushed through.

Third, the extension buys time, and that time must be used. We Icelanders tend to achieve remarkable things when the clock is running down, but when no deadline forces the pace, often little happens in between. We cannot afford to wait for the next deadline before pursuing a permanent solution.

Fourth, shipping must be given the same priority as aviation. Unfortunately, the same political leadership has been lacking on shipping. Over recent months the government has come to better understand the importance of international advocacy on shipping, but the issue has not yet been placed high enough on the list of priorities. The gains to be made here are real. The government must give the civil service a clear mandate to work with industry, without obstruction, to identify possible solutions and make the case for Iceland’s specific circumstances.

Fifth, there is ground to be gained by approaching the issue from the standpoint of Iceland’s security interests. So far, advocacy has mainly focused on economic interests. If the government defines transport and logistics as a pressing matter of national and economic security, as proposed at the start of this article, advocacy carries different weight than when the issue is framed in economic terms alone. Iceland’s partners must be approached on the basis that without extensive transport links and a level playing field with other states, Iceland’s economic security and crisis response capacity are at risk.

The Arctic opens opportunities in transport

Risks and threats are far from the only things on the horizon for the transport and logistics sectors. The opportunities are many, if Iceland has the sense to put the right conditions in place.

First, Iceland builds on a strong foundation as one of the main transport and logistics hubs in the Arctic, a region of growing importance in international politics. As the Arctic sea ice retreats, new shipping routes are opening that offer considerable opportunities for Icelanders.

Second, there are clearly significant economic opportunities in the Arctic, including in connection with oil extraction in the region. Greenland also holds large deposits of rare earth elements and other raw materials, which are likely to be extracted on a larger scale in the coming years. That activity will require the transport of people, equipment and materials.

When these opportunities materialise, it is important that we Icelanders have strong infrastructure and companies able to make use of them. Measures to strengthen Iceland’s competitiveness and secure its interests in international cooperation are therefore about more than averting risks; they also leave us better placed to seize opportunities. And the greater our activity in the Arctic, the more important Iceland’s position becomes in international politics. There is much to be gained.

Press ahead, stay secure

Overall, Iceland is in a strong position in international transport and logistics. For now, the strong transport and logistics network of Icelandic companies can be seen as an asset for Iceland’s security. But the warning lights have started to flash. The competitiveness of companies in these sectors has been squeezed from three directions at once, and no one has the job of looking at the whole picture. That must change. The government should name transport and international supply routes explicitly in the National Security Policy at its next revision, no later than 2028, and follow through with the five tasks, both at home and with our partner states. For a small island state, transport and logistics are a matter of national security, not only of economics.

In 2020 we saw how quickly the connections can be severed. We should not wait for the next reminder.