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Iceland Has Power To BurnThe tiny island nation can teach the United States valuable lessons about energy policy.

By Daniel Gross
Posted Wednesday, April 9, 2008, at 2:57 PM ET

This piece also appears in the current issue of Newsweek.

Other Newsweek stories on the theme of environmental leadership include:

Which candidate is greenest?
Why cars don't get 50 mpg
Gallery: The century's environmental leaders
Gallery: The history of solar energy

The Blue Lagoon, Iceland's largest tourist destination, is a 100-degree melting pot. On a cold March day, as driving rain blows wisps of vapor from the nearby geothermal power plant, a group of Brazilian twentysomethings, a Japanese couple, and teens from St. Paul's, a New Hampshire prep school, wade through the milky water and coat themselves in silica mud.

The lagoon was created entirely by accident. In the 1970s, the Svartsengi geothermal plant began to discharge water rich in salt, algae, and silica, which turned into a kind of caulk. A pool formed in the featureless lava fields in western Iceland, and when locals jumped in, they found that it cleared up symptoms of skin ailments like psoriasis. Today, the Blue Lagoon sports a 15-room clinic and a spa that attracts 407,000 tourists annually. With revenue of $21 million and 200 workers, the Blue Lagoon is an Icelandic blue chip. "We are one of the 300 largest enterprises in Iceland," says Anna Sverrisdottir, managing director of the Blue Lagoon.

Iceland's economy, which until recently relied largely on fishing, has diversified in recent years, with rapid growth in tourism, manufacturing, and financial services. And like the Blue Lagoon, much of the growth has been a happy byproduct of Iceland's decadeslong strategy of tapping sources of renewable energy. Mindful of climate change and the need to limit emissions, many U.S. states have set goals of obtaining 10 percent or 15 percent of their energy from renewables at some point in the distant future, and the European Union has pledged to reach 20 percent by 2020. But Iceland is already at about 80 percent. All electricity on the island is generated through geothermal or hydroelectric sources—low-emissions sources that don't use fossil fuels. Most homes are heated by water pumped from geothermal hot spots. "We are blessed with a lot of clean and renewable energy," Prime Minster Geir H. Haarde told Newsweek. "The only uses of fossil fuels in Iceland are people using cars and the fishing fleet." And increasingly, Iceland, whose most prominent exports have been haddock and Björk, is devising ways to export what has been a stranded resource.

Iceland is a small island with a tiny, ethnically homogenous population: only 300,000, with more than half living in the capital, Reykjavik. It lacks coal reserves and is endowed with massive glaciers, which produce huge volumes of water that can be harnessed to generate electricity. It also happens to sit atop a rift in the Earth's crust that keeps significant reservoirs of heat bubbling near the surface. To a large degree, it is the polar opposite of the United States. Yet we—and other developed nations—can learn some valuable lessons from Iceland about what happens when a society commits to the systematic development of renewable energy.

From the cobblestone streets of downtown Reykjavik, the storybook-cute capital, to the stark fjords of the east, positive collateral benefits—many of them unintended—are evident. None looms larger than the new $1.5 billion Alcoa Fjardaal plant, which represents the largest single private-sector investment in Iceland's epic history. East Iceland, separated from the more populous west coast by the vast Vatnajokull glacier, has been down on its luck in recent years. The fishing villages nestled against the rocky shore, separated by mountains—one of which is penetrated by a terrifying one-lane tunnel—have been losing jobs and their youth to Reykjavik. Reindeer seem to outnumber people.

But the American aluminum giant decided to build its first new smelter in 20 years near the town of Reydarfjordur, largely because of the promise of abundant clean power. Smelters require an immense amount of energy. Power-intensive companies like Alcoa are concerned both with their images and with the potential for initiatives that imposes costs on burning fossil fuels—from emission caps to carbon taxes. So when Landsvirkjun, the national utility, said it would build a 690-megawatt hydroelectric power plant 30 miles away, Alcoa took the plunge. Construction began in 2004, and today the massive plant—its 336 pots cover an expanse of nearly three-quarters of a mile, the largest such line in the world—produces massive quantities of aluminum bars, coil, and sheets. "It's almost the ideal place to invest, because of the combination of a highly skilled work force, an open and transparent democracy and the endless supplies of renewable energy," says Jake Siewert, vice president for environment, health, and safety at Alcoa.

The plant employs about 650 people directly—400 Alcoa employees and 250 contractors in areas such as maintenance, catering, and security. Alcoa's presence has also stimulated the creation of an additional 300 jobs in shipping, logistics, and engineering, says Tomas Sigurdsson, a Cornell-trained engineer who is managing director of Alcoa Fjardaal. By creating enough jobs for 15 percent of the region's work force, the plant has lured Icelanders back to the east and stimulated the first housing construction in more than a decade. "The Alcoa project has revitalized the economy on the east coast of Iceland," says Prime Minister Haarde. The plant is also a showpiece for Alcoa's sustainability efforts. As we sit in the glass-walled cafeteria, dining on curried Icelandic lamb and looking out over crystalline water, an official explains how new technology captures emissions from the plant's smokestacks.

Icelanders regard plentiful, cheap, guilt-free energy as part of their birthright. In the 1930s, Reykjavik's municipal utilities began tapping into the Earth's crust, liberating energy bubbling under the surface to heat homes and water for domestic use. In the 1960s and 1970s, the country began to tap geothermal sources to drive turbines and create electricity. As Iceland has grown more connected with the global economy, its financial markets and institutions have been subject to volatility. But consumers have been insulated from the shocks of higher energy prices. Many things are expensive in Iceland, especially food. (A slice of surprisingly decent pizza in downtown Reykjavik will set you back $7.) But energy is cheap. Over the past 10 years, the price of electricity, compared with a broad measure of inflation, has fallen 75 percent in Iceland.

Icelanders are energy hogs. SUVs are as common on the roads in Reykjavik as they are in Rochester, N.Y. They use electricity to power de-icing systems in driveways and city streets and to heat 130 outdoor swimming pools, which are to Iceland what Starbucks outlets are to Seattle. "If you want to hear the current gossip in England, you go to a pub; here, you go to a swimming pool at 6:30 in the morning," says Asgeir Margeirsson, CEO of Geysir Green Energy, a private-equity firm that specializes in geothermal energy. In 2004, per capita electricity use in Iceland was nearly twice the amount in the United States. But their profligacy doesn't tax the economy or the environment unduly. From the low-slung headquarters of Reykjavik Energy, the capital city's utility, puffs rise from the horizon. The water vapor is the only form of emissions produced by the Hellisheidi Geothermal Power Plant, which sits in the snow-covered hills 13 miles outside of town. Iceland is one of the world's wealthiest nations, measured by income per capita, and the U.N. Human Development Index rates it the most livable nation on the planet.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
Photograph of Björk on Slate's home page by Paul Kane/Getty Images
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