13. Iceland
Iceland has seen limited reform to agricultural policies and support remains among the highest in the OECD. At 57% of gross farm receipts, the producer support estimate (PSE) was more than three times the OECD average in 2019-21. Market price support measures account for 50% of agricultural support, principally tariffs that maintain high domestic prices relative to world prices and cause a large transfer from consumers to agriculture producers. Market price support is complemented by payment entitlements directly or indirectly coupled with production factors. Output payments for milk producers and largely decoupled payments to sheep meat producers represent most of the remaining support to farmers. About 70% of farm support is potentially most-distorting to production and trade.
On average, effective prices received by farmers have declined over time, but remain almost double those in world markets. Poultry and egg products experienced the largest divergence between domestic and world prices in 2019-21. Market price support accounts for more than 71% of single commodity transfers (SCT) for these products. SCT represent 97% of total PSE.
Expenditures for general services (GSSE) relative to the value of agricultural production decreased from 8% in 1986-88 to 3% in 2019-21 because the value of production more than tripled while expenditures increased by around 70%. Over half of these are for inspection and control, with much of the rest devoted to public stockholding. Total support to agriculture (TSE) as a share of GDP declined significantly from 5% in 1986-88 to 1% in 2019-21.
The Agricultural Framework Agreement entered into force on 1 January 2021 and covers the general operating environment for the agricultural sector. One of the main elements of the revised Agreement is full carbon neutrality of Iceland’s agriculture sector before 2040.
Several changes came into force in 2021 following the 2020 revision of the horticultural agreement. The revised agreement aims for a 25% increase in the domestic production of vegetables by 2024 and the inclusion of horticulture in the carbon neutrality goal for agriculture. Total annual support to horticulture farmers was increased by 25% to meet these goals. The main aims are to increase diversity in horticulture production, increase organic production and foster innovation.
Agriculture plays a central role in Iceland’s climate policy and efforts to reach carbon neutrality. Agriculture represents a significant share of the country’s GHG emissions, mainly due to the size of the livestock sector. Emphasis on measures to reduce GHG emissions from agriculture is key to Iceland’s ambition for a low-carbon economy and will contribute to its challenging goal of carbon-neutral agriculture before 2040. However, current agricultural support measures, especially market price support and output payments for ruminant products such as milk and wool, counteract and reduce the effectiveness of GHG mitigation measures in agriculture.
Producer support should be decoupled from agricultural production and favour less production- and trade-distorting and less environmentally harmful forms of support. Re-instrumentation of producer support from production-coupled support measures towards decoupled support payments with environmental cross-compliance requirements, and towards specific agri-environmental measures, including GHG mitigation measures, would contribute to reaching agriculture’s carbon neutrality target by 2040.
In addition, shifting budget expenditure from producer support towards Iceland’s agricultural innovation systems and other general services could increase innovations to enhance productivity and environmental sustainability performance in the agriculture sector.
With the continued application of multi-year agreements between the government and the Farmers’ Association, changes to overall agricultural policy are relatively limited and Iceland’s support to farmers remains well above that of most OECD countries. Moreover, the largest part of support to farmers is dominated by production-coupled support measures, mainly market price support and output payments, which are the potentially most production- and trade-distorting, and environmentally harmful support measures.
Despite progress reducing border protection for some agricultural products, import tariffs remain high for several groups, placing a burden on consumers and distorting associated markets.
Overview of policy trends
Iceland’s agricultural policy focuses on food security, safety and quality; strengthening rural activity; environmental sustainability; and maintaining farm income.
Iceland supports agriculture heavily and reforms over time have been limited. Support consists mainly of price support sustained with border measures and quotas. Dairy producers receive payments based on output. In 1996, support to sheep meat producers changed from price support to direct payments based on historic entitlements. A regional scheme for sheep farmers implemented in 2008 provides additional direct payments based on historic entitlements. Individual non-transferrable quotas for milk producers were introduced in 1980 and went through a number of reforms. In 1992, the current system of freely transferable quotas was introduced, and production-based payments were linked to the quota, paid directly to the farmer.
Since the mid-1990s, tariffs on agricultural products were reduced. However, tariffs on several agriculture product groups, particularly meat, dairy and flowers, remain high and complicated. A large number of compound duties with both ad valorem and specific duties apply. Export subsidies for agricultural products have not been provided since the early 1990s.
The policy mix remains dominated by production- and trade-distorting measures. Iceland continues to provide agricultural support through market price support maintained by border measures, and through direct payments based on entitlements directly or indirectly coupled with production.
Support to producers declined since the mid-1980s. An important reduction in market price support took place at the beginning of the 1990s, but market price support still accounts for around half of total support to agriculture. More than two-thirds of producer support is provided based on prices (Figure 13.4). TSE has declined over time, averaging 1% of the country’s GDP in recent years, with PSE being the dominant component at 95%. The remaining TSE is financing for GSSE, almost half of which comprises expenditures for inspection, with public stockholding expenditures responsible for much of the remainder.
Main policy instruments
The objective of Iceland’s agricultural policy is to maintain and strengthen a diverse agricultural sector to the extent that physical and marketing conditions allow. The key goals are to: meet domestic demand where realistically possible; maintain sustainable production of high-quality, healthy products; improve efficiency and competitiveness; improve farmers’ incomes; foster innovation and create job opportunities; and sustain livelihoods in rural areas.
Agricultural policies in Iceland are based on two legal instruments. First, the policy concerning production and marketing of agricultural products (laid out in the Act on the Production, Pricing and Sale of Agricultural Products No. 99/1993) establishes objectives for Iceland’s agricultural policy and provides the framework for Icelandic agriculture and its regulation. The second legal instrument concerns policies for the provision of support to farm construction projects, livestock improvement and extension (advisory) services (laid out in Act on Agriculture No. 70/1998).
The government negotiates with the Farmers’ Association concerning the general framework for support and production control in the cattle, sheep and horticultural sectors. There is also an agreement on so-called horizontal support, such as advisory services, breeding, animal welfare, environmental protection, sustainable land management, organic farming and land cultivation. The current agreements cover 2017-26, with extensive reviews in 2019 and again in 2023. Changes in 2019 to the agreements for sheep farming and cattle entered into force on 1 January 2020. In 2020, the agreements on horticulture and the framework agreement (horizontal support) of agriculture were revised and the new agreements all entered into force on 1 January 2021.
Iceland’s agricultural support comes through price support (maintained by border measures), and direct payments based on payment entitlements coupled with production factors. Price support is provided for all livestock products and some horticultural products. Direct payments are provided to cattle (mainly dairy) and sheep producers, and on a smaller scale, to certain greenhouse producers.
For dairy, direct payments depend on the size of a producer’s quota and the current number of animals. Headage payments are provided for up to 180 dairy cows and 260 beef cows per farm, with full payment for each of the first 50 dairy cows and 200 beef cows, then at a declining rate for each additional cow. The Ministry of Fisheries and Agriculture sets a national dairy production quota divided among producers based on their annual quotas for the preceding year. Annual dairy quotas also determine entitlements for direct payments. Production in excess of quotas is permitted, provided all such production is for export. Wholesale prices are regulated for approximately half of all dairy products based on the volume of raw milk required. A government-chaired committee representing both the Farmers’ Association and the labour union (acting on behalf of consumers) determines the guaranteed minimum prices for milk delivered within production quotas on an annual basis. Trade in support entitlements (basic payments to all active dairy and cattle farmers) between entitlement holders is allowed with quantity limitations and takes place in a market operated by the government. Dairy producers also benefit from support for breeding, land cultivation and development programmes.
For sheep, direct payments link to entitlements based on historical production. However, eligibility to receive full payments requires keeping a minimum number of winter-fed sheep on the farm. Additional payments to sheep farmers relate to a quality-control scheme for lamb meat based on animal welfare, product quality, traceability and sustainability criteria. Premium payments are provided at the wholesale level for purchasers of wool, and to farmers to co-operate in increasing added value for sheep products.
Imports of meat, dairy products, and some vegetables that compete with domestic production are subject to tariffs, often compound duties with an ad valorem component of 30% and a specific duty that varies from ISK 5/kg (USD 0.04/kg) to ISK 1 462/kg (USD 2/kg). However, products originating in partner countries of the European Economic Area (EEA) or in one of the 41 countries with which Iceland has free trade agreements may carry lower tariffs. The agreement for the cattle sector includes a provision to change the specific duties for certain cheese and milk powder products based on changes in the Special drawing rights to Kronoa (SDR/ISK) exchange rate from 1995 to 2016, effective 1 March. Since then, the specific component was adjusted annually to the 12-month evolution of SDR/ISK.
Iceland is a member of the European Economic Area (EEA) and of the European Free Trade Association (EFTA). While the EEA Agreement does not apply to most trade in agricultural goods, it opens trade in several processed agricultural products and encourages bilateral agreements on primary commodities.
As a member of EFTA, Iceland is also party to several Free Trade Agreements (FTAs), including with countries in Southeast Europe, North Africa and the Middle East, Latin America, and Asia, as well as with the South African Customs Union. In addition, Iceland has bilateral FTAs with the Faroe Islands, Greenland, and the People’s Republic of China.
Climate change mitigation policies in agriculture
Agriculture represents a significant share of Iceland’s GHG emissions – 13.1% in 2019, well above the OECD average of 9.5% – mainly due to the size of the livestock sector. Methane emissions from enteric fermentation and manure management, and nitrous oxide emissions from manure management and application of fertilisers historically account for over 99% of emissions from agriculture, with less than 1% from carbon dioxide.
According to Iceland’s Nationally Determined Contributions (NDC) submitted to the UNFCCC under the Paris Agreement on Climate Change, Iceland aims to be part of European countries’ collective 40% reduction in GHG emissions compared to 1990 levels by 2030. A precise commitment for Iceland within this delivery has yet to be determined and depends on agreement with the European Union and other countries. Iceland’s participation in the EU Emissions Trading System will be key in this regard, considering that almost half of Iceland’s emissions would be regulated through this scheme. In December 2020, Iceland’s prime minister introduced a new target 55% reduction in GHG emissions by 2030. The government plans to make the economy largely carbon-neutral by 2040.
Revisions of the Agricultural Framework Agreement took place in 2020. The revised agreement entered into force on 1 January 2021 and includes a goal of carbon-neutral agriculture by 2040 and increased emphasis on environmental issues and climate change. The agreement states that elements of a new agriculture policy for the future would be the foundation for fundamental changes in the next revision process, anticipated in 2023.
Iceland’s 2020 Climate Action Plan contains five actions for agriculture. These include: improved utilisation and handling of fertilisers by reducing the use of mineral fertilisers; improved livestock feeding to reduce enteric fermentation; increased domestic vegetable production; carbon neutrality in cattle breeding; and implementing a project called Climate-Friendly Agriculture. This project provides comprehensive advice and education to farmers with the aim of reducing GHG emissions from agriculture and land use. The project started in February 2020 and continued with new participants in 2021.
In October 2019, the European Union, Iceland and Norway formally agreed to extend their climate co-operation for 2021-30 by including the Effort Sharing Regulation and the Regulation on GHG Emissions and Removals From Land Use, Land Use Change and Forestry (the LULUCF Regulation), into the EEA Agreement. According to the agreement, Iceland is to fulfil its GHG emission reduction target for 1 January 2021 to 31 December 2030 in accordance with the ETS-directive, LULUCF Regulation and the Effort Sharing Regulation.
Domestic policy developments in 2021-22
The revised Agricultural Framework Agreement entered into force on 1 January 2021 covering the general operating environment for the agricultural sector. Main elements of the revised Agreement include full carbon neutrality of Iceland’s agriculture before the year 2040 and a consensus that a new agricultural policy will be the basis for the second revision phase in 2023.
Several changes came into force in 2021 following the 2020 revision of the horticultural agreement. The main goals of the revised agreement are to increase by 25% of domestic production of vegetables by 2024 and that horticulture will be carbon neutral in 2040. Total annual support to horticulture farmers was increased by 25% to meet these goals. The aim is, among other things, to increase diversity in horticulture, increase organic production and innovation.
The milk production quota was set at 145 million litres in 2021 but will be increased to 146.5 million litres in 2022. Production in excess of the quota must be exported. Payments to farmers are made in equal monthly payments of one-twelfth of the annual quota. In 2021, the minimum farm gate price for milk delivered within the production quota was set at ISK 100.5 (USD 0.80) per litre.
A proposal for a new and extensive agriculture policy was formed in 2020-21. Parliament is expected to approve this in 2022, resulting in a public policy for the agricultural sector until 2040. The proposal contains nineteen topics, including organic agriculture, environmental issues, biodiversity, education, the Fourth Industrial Revolution (4IR), and innovation. The key objectives of the policy proposal are to enhance food security, sustainable land use, increased value creation and competitiveness on the basis of science and latest technology and to promote thriving agriculture throughout the country.
A new fund (Matvaelasjodur) was established as part of the Agricultural Productivity Fund, in order to further strengthen research and development in food production and food processing. Grants from the fund are not limited to primary agriculture production but are intended to stimulate innovation in food production in general. Emphasis is on innovation, sustainability, value creation and competitiveness. The fund is specifically designed to help to meet the SDG of the United Nations.
Trade policy developments in 2021-22
In 2021, Iceland, Liechtenstein and Norway (EEA-EFTA countries) completed negotiations for an FTA with the United Kingdom. The United Kingdom is an important trade partner for Iceland and the ambitious and comprehensive agreement covers trade in goods and services. In essence, the agreement ensures that the terms of trade Iceland had with the United Kingdom when it was an EU Member, will remain unchanged. Iceland will grant tariff quotas for cheese and processed meat products and receives tariff quotas for lamb meat and skyr (a thick and creamy Icelandic yogurt made from skim milk).
In 2021, the government introduced a new digital tariff quota allocation system. The system is supposed to facilitate importers to apply for TRQs. Also, the TRQ between Iceland and the European Union was fully implemented after four years of staging.
Iceland is a small, sparsely populated country with a GDP per capita above the OECD average. Agriculture contributes about 5% of GDP and 4% of employment. Conditions for agriculture in Iceland are limited by the country’s geographical conditions. The growing season is short – around four months – yields are low, and production and transport costs are high. Approximately one-fifth of the total land area of Iceland is agricultural land, mostly suitable for fodder production and livestock raising. Only around 6% of agricultural land area is arable land.
Livestock-rearing is the main farm activity, with milk and sheep meat being the most important products. Livestock production is mostly grassland-based and most farm animals are native breeds. The main crops are hay, cereals for animal feed and vegetables – the latter are cultivated primarily in greenhouses heated with geothermal energy. The main agricultural exports are pure-bred horses for breeding, sheep meat products and fur skins. The range of Iceland’s agricultural products is limited and meets approximately 50% of total domestic food requirements. Consequently, Iceland is a net importer of agricultural products (excluding fishery goods), mainly for final consumption. Imports are more diversified than exports, and have increased steadily in recent years.
Iceland’s economy is recovering from a deep recession caused by the COVID-19 pandemic. The economy is projected to grow by 5.2% in 2022 and 4% in 2023, driven by rebounding foreign tourism and robust goods exports, and the unemployment rate is expected to be around 7% in 2022 on the back of accelerating growth (OECD, 2021[1]). Iceland’s prosperity has been built on the sustainable management of its abundant natural resources, including the comprehensive fisheries management system based on individual transferable quotas, renewable energy (geothermal and hydro) and carbon sequestration opportunities (afforestation, revegetation).
Output growth in agriculture (7%) has clearly outpaced the global average (2%) over the 2010-19 period, which has been driven by commensurately robust growth in total factor productivity (TFP) of 7% per year – which was also much higher than the global average rate of 1.4%. This is mostly related to a significant output growth in aquaculture and much less so in crop and animal output. At the same time input growth has decreased.
A harsh climate, lack of suitable land, small average farm size, and the narrow genetic base for traditional livestock present significant constraints to the sector. Due to its relatively low livestock densities, Iceland’s nutrient balances show a comparatively small surplus of both nitrogen and phosphorus. Iceland has the lowest pesticide sales per hectare in the OECD area and the sector’s share of energy use has fallen over time. Agriculture continues to represent a significant share in the country’s total GHG emissions – well above the OECD average – mainly due to the importance of the ruminant livestock sector. Emissions of CH4 emissions from enteric fermentation and manure management, and N2O emissions from manure management and fertilisers have historically accounted for over 99% of the total emissions from agriculture, with less than 1% arising from CO2. With abundant water and a small population, total water abstraction in Iceland is less than 1% of total available freshwater resources. This is one of the lowest intensities of water resource use in the OECD, although the freshwater abstractions per capita are the highest in the OECD area (OECD, 2019[2]). The share of agriculture in total water abstractions has decreased over the past two decades.
References
[1] OECD (2021), OECD Economic Surveys: Iceland 2021, OECD Publishing, Paris, https://doi.org/10.1787/c4edf686-en.
[2] OECD (2019), “Water: Freshwater abstractions (Edition 2018)”, OECD Environment Statistics (database), https://doi.org/10.1787/09a848f4-en (accessed on 7 April 2022).