Car Taxes and Fees to Rise in Iceland

driving in reykjavík

The cost of owning a car in Iceland will rise significantly next year, if the 2023 budget bill is passed in its current form. The bill proposes hikes in gasoline and emissions taxes as well as the general vehicle tax. A new tax will be imposed on electric cars and new road tolls will also be implemented. The green energy transition will require the Icelandic government to restructure how it taxes vehicles and fuel, the main source of funding for road and transport infrastructure.

“Goes way too far”

The hikes in fees and taxes represent a 36% increase in revenue from vehicles for the state, according to Rúnólfur Ólafsson, chairman of the Icelandic Automobile Association (FÍB). “And then this comes with new taxes on both petrol and diesel,” Rúnólfur told RÚV. “This is happening at the same time as the Minister of Infrastructure is talking about greatly increased new taxation of public use of vehicles with so-called road tolls in tunnels, over bridges, and so on.”

Public transport infrastructure is limited in Iceland, meaning that the majority of the population relies on private vehicles to access employment and services. Rúnólfur says the additional costs will hurt the most vulnerable sectors of the population. “These are hugely increased charges that are being announced in one fell swoop, and we believe that this goes way too far as it is being proposed now.”

Cost of electric vehicles to rise

The government also proposes applying a 5% minimum excise duty on all cars, meaning that a full discount will no longer be applied to electric cars. While Finance Minister Bjarni Benediktsson stated there will continue to be strong incentives to buy environmentally friendly cars, FÍB calculates that the excise duty and value-added tax will raise the cost of electric cars by ISK 300,000 [$2,150; €2,150], though the rise could be as much as ISK 1 million for some cars [$7,160; €7,160].

Iceland funds the maintenance and development of roads and infrastructure through taxation on vehicles and fuel. A notice on the budget bill states the restructuring of this taxation will be one of the biggest challenges for the treasury in the coming years.

Iceland’s Low-Cost Electricity in High Demand as Energy Prices Skyrocket in Europe

Low cost of electricity in Iceland compared with the rest of Europe

There is an increasing demand amongst foreign companies to base their operations in Iceland due to favourable energy prices, but the demand far exceeds what the country’s power plants can produce. RÚV reports that Landsvirkjun, the National Power Company of Iceland, says there’s a pressing need for increased electricity production.

‘New, potential customers are knocking on the door’

With Russia cutting off petrol pipelines to Europe, energy prices on the continent are skyrocketing. Meanwhile in Iceland, energy prices have remained almost unchanged. “It’s our renewable energy that makes this possible,” says Tinna Traustadóttir, Executive Vice President of Sales at Landsvirkjun. And as gas prices continue to rise, it’s not only consumers, but also companies, that are suffering. This has led to many enterprises—not least energy-guzzling aluminium smelters—going under as a result.

The state of Europe’s changing energy landscape is “reflected in high demand from existing customers,” explains Tinna, “and we also feel that there are new, potential customers knocking on the door.” At present, however, Iceland has no electricity to spare.

“As it stands now, you could say our electricity system is at full capacity, or as close to that as possible. And of course, it takes time to generate a new supply, but the situation is a pressing one,” says Tinna.

‘We will need to prioritize…but it’s clear we need to accelerate’

As a result, many foreign companies are clamouring to relocate their operations in Iceland, but the demand not only far exceeds the country’s current energy supply, it also exceeds Landsvirkjun’s plans for future  electricity production.

“We will need to prioritize,” says Tinna, listing off Landsvirkjun’s competing energy interests. “Domestic energy exchange, domestic food production, technological progress, supporting our current customers. But it’s clear we need to accelerate.”

Stocks Tumble, Gasoline Soars

icelandair757

Iceland has not been immune to the economic effects of the Russian invasion of Ukraine. Gasoline prices rose to ISK 303 ($2.27; €2.06) per litre around the country this morning, while diesel prices also surpassed ISK 300 per litre. Nasdaq Iceland’s index has dropped 12% since the invasion began, with the value of Icelandair stocks dropping by 32%. This drop has entirely erased the stock exchange’s steady gains over the past year.

Nasdaq Iceland’s selected share index hit a low in March 2020 at the beginning of the COVID-19 pandemic. It rose gradually from that date, until reaching a high point last September, RÚV reports. The day the Russian invasion began, the selected share index dropped by 6%. The stock index remains significantly higher than it was in March 2020, but its gains over the past year have been fully erased.

Íslandsbánki’s Chief Economist Jón Bjarki Bentsson outlined the three main factors causing stock prices to fall in Iceland. Firstly, the uncertainty created by the Russian invasion of Ukraine has pushed investors to opt for less volatile assets. Secondly, rising energy and raw material prices impact the operations of companies that depend on those resources. Thirdly, the uncertain economic outlook on a global level may impact how well Iceland’s tourism industry bounces back from the pandemic and how many people travel to Iceland in the near future. This last factor impacts companies such as Icelandair significantly.

Rúnólfur Ólafsson, CEO of the Icelandic Automobile Association, has pointed out that rising gas prices impact often impact those who are the most disadvantaged, as well as impacting the cost of transporting goods and the cost of snow removal for municipalities. He called on the government to temporarily lower taxes on gasoline in order to mitigate the impact.

As Gasoline Use Drops Iceland Must Find New Ways to Fund Infrastructure

driving in reykjavík

Icelandic authorities are looking into new ways to tax vehicle use, Finance Minister Bjarni Benediktsson stated at a tax conference this morning, RÚV reports. Road and transport infrastructure in Iceland is currently funded by tax revenue from gasoline, and that revenue has decreased significantly in recent years, due to electric car use and other factors. 

“It’s important that we create a bridge from the old system and into the new one to ensure the treasury has enough revenue in the long term in order to support the development and maintenance of transport infrastructure,” Bjarni stated, adding that creating a new revenue system for transport and infrastructure was one of the biggest tax-related projects of this government term. The government would look at other ways of taxing vehicles, including by the distance driven, according to Bjarni. Any new taxation system implemented would need to continue to encourage consumers to buy greener vehicles, however. “We’ll see how it goes, that’s one of the big projects and we have already started,” Bjarni stated.

The Finance Minister also reviewed the government response to the ongoing pandemic at today’s conference. The taxation system had been amended to support homes and businesses due to the pandemic and help them grow out of the ensuing difficulties. Bjarni added that the Central Bank’s rate hikes could be taken as a warning, and that public funds in support of businesses and individuals must be reduced when possible.

Short-Term Tourism Indicators Show Significant Declines

Traffic on Iceland’s Ring Road decreased by a third in March as compared to the same time last year. Likewise, overnight stays in hotels last month went down significantly. This per a report on short-term tourism indicators published by Statistics Iceland on Friday.

Comparing figures from March 2019 with March 2020, Statistics Iceland determined that traffic on the Ring Road went down by a third overall, with a 31% reduction in both South and West Iceland, a 33% reduction in East Iceland, and a 36% reduction in the North. Car rentals were also down 16% from last year, with 18,361 rentals in March; 63% of the available rental cars in Iceland were inactive last month.

Not unexpectedly, a separate report published by Statistics Iceland shows that gasoline sales are also down significantly in the country: 42% lower in March of this year as compared to March 2019 and 68% lower so far in April. The gathering ban took effect in Iceland on March 15; gasoline sales were about 8% higher in the days leading up to the ban.

Initial figures show that there were 181,000 overnight stays in hotels in Iceland last month, which is down a staggering 53% from March 2019. The bed usage rate was 25.3%, as compared to 56.8% during the same time period last year.

“Roughly 96,000 passengers arrived at Keflavik airport in March and their number decreased by 55% compared to the same month last year when there were 213,000 passengers departing,” reads the report. “The number of Icelandic passengers decreased by 64% during the same period, from 43,000 to 16,000, while the number of foreign passengers decreased by 53%, from 170,000 thousand to 80,000.”

See the full report on short-term tourism indicators (in English) here.

Akureyri Builds 13th Gas Station

While Reykjavík has one gas station per 3,000 residents and London, England has one per 10,000, Akureyri, North Iceland, has one gas station per 1,500 residents. Reykjavík City Council has implemented an action plan to halve the number of gas stations in the city by 2025, Akureyri is working in the opposite direction, RÚV reports.

Akureyri is the largest town in North Iceland, with a population of just under 19,000. Despite the Icelandic government’s plans to institute a total ban on new diesel and petrol cars by 2030, the town is currently constructing its 13th gas station, on Sjafnargata street. Akureyri City Councillor Sóley Björk Stefánsdóttir of the Left Green Movement says car culture prevails in the town. Earlier this week, children and those with respiratory conditions were warned to stay inside due to high levels of particulate pollution.

Car culture dominates

“There is no clear spirit within the local council to address the issue and think about how we’re going to use this space that’s being covered by gas stations,” Sóley remarked. “There is a huge emphasis on car ownership here and that everyone needs to drive. I forgot my lunch at home and I’m on my way to a meeting and I realised I had to turn around to get a banana because I can’t buy a banana downtown in Akureyri, but I can take gas.”

Tryggvi Þór Ingvarsson, chairman of the planning council, says that the reduction of space at Olís gas station on Tryggvabraut resulted in the decision to allocate the company a plot of land on Sjafnargata. When asked whether he believes the number of gas stations in Akureyri was reasonable, Tryggvi responded: “Yes and no, it has a historic explanation. It may not be reasonable for there to be 1,500 people per each gas station, but it’s not necessarily unreasonable either.”

Reykjavík to Reduce Gas Stations by Half by 2025

Reykjavík is set to dramatically reduce the number of gas stations in the city by 2030, Vísir reports. Currently, there are 75 gas stations in the capital area, but Reykjavík City Council has approved plans to reduce these to around 37 in the next six years as part of its environmental initiatives.

Mayor Dagur B. Eggertson announced the plan on his Facebook page this week, saying that the gas stations will be replaced with apartment buildings, shops, and other services. Originally, the city had intended to meet this goal by 2030, but Dagur noted that the City Council liked the initiative so much that everyone agreed to comply with a tighter deadline.

Reykjavík’s climate plan foresees gas stations largely disappearing from the city by 2040 and that vehicular traffic and public transportation will also be greenhouse emission-free by the same time. Current projections are that private cars will account for 58% of transportation by 2030, while public transportation will account for 12% and cycling 30%.

Petrol Prices Dropping

The reference price of petrol in Iceland has fallen for three months in a row, Kjarninn reports. The current reference price for petrol is ISK 215.5 ($1.80/€1.58) per litre, which is the lowest it’s been since it hit a three-year high in October 2018. At that time, the reference price for petrol was ISK 224.3 ($1.87/€1.64) per litre. The last time petrol prices had been that high in Iceland was June 2015.

Although the price of petrol has been falling, the mid-January figure is still 8.4% higher than it was in the middle of January 2017, when petrol cost an average of ISK 198.8 ($1.66/€1.46) per litre. For reference, the króna to US dollar exchange rate dropped by 10.2% in 2018, and the cost of crude oil on the global market has dropped by just under 12% since the middle of January 2018. The exchange rate is an important factor on the sale price of petrol in Iceland, as the purchase price of imported petrol is calculated in US dollars.

The Icelandic state takes a portion of the profits from each litre of petrol sold. Thus, in 2018, 20.46% of the cost of petrol went toward a special petrol tax, 12.69% went to general petrol tax, and 3.83% went to a carbon tax. Lastly, 19.35% of the sale price is VAT.

All combined, 121.39 krónur from every litre of gas sold went to the Icelandic government in 2018, or 56.33%. The highest that the government’s take has reached is 60.26% in July 2017.

Króna Continues to Weaken

currency iceland

The króna continues to weaken despite the intervention of the Central Bank of Iceland, RÚV reports. Following a significant drop in value yesterday, the Icelandic currency has weakened by 11% in the last two months.

The weakening of the currency will mean Icelandic consumers will pay more for imported products and online purchases from abroad. One example are Netflix subscriptions, which have gone up by ISK 137 ($1.15/€1) per month.

The weakening króna in combination with rising fuel prices in international markets have also affected gas prices, which were around ISK 210 ($1.77/€1.53) per litre at the beginning of the year and hover at ISK 230 ($1.94/€1.68) per litre today.

Gas Prices on the Rise

The price per liter of gasoline has increased by just over 18% in the last year, RÚV reports. According to a recent survey conducted by the Icelandic Automobile Association (FÍB), the cost of gasoline per average family car is therefore around ISK 60.000 [$559; €482] more per year than it was at the same time last year.

According to FÍB figures, a liter of 95 octane gas obtained at a self-service pump cost ISK 193 [$1.80; €1.55] in June 2017. The price has increased steadily over the year and is now at ISK 228 [$2.13; €1.83] per liter. This represents an almost 18% increase in one year.

FÍB director Runólfur Ólafsson mainly credits the jump to increases on the global market, as well as tax increases on both regular and diesel gasoline that went into effect at the end of last year. He also notes that the króna has weakened in comparison with the American dollar over the last month. “But first and foremost,” he noted, “this is an increase in prices on the global market.”