The Iceland aviation emissions exemption could remain in place until 2030 after the European Commission backed a three-year extension of the country’s special treatment under the EU Emissions Trading System. The arrangement is intended to limit the competitive disadvantage faced by airlines operating transatlantic connecting flights through Keflavík Airport.
The Commission included its position in a broader proposal to revise the EU Emissions Trading System, commonly known as the EU ETS. The legislative package must now be negotiated and approved by EU member states and the European Parliament.
As Iceland participates in the system through the European Economic Area, the extension will also require a formal decision by the EEA Joint Committee.
Why Iceland has a special aviation emissions arrangement
The EU ETS requires airlines to surrender allowances corresponding to the emissions generated by flights covered by the system. The cost is designed to encourage carriers to reduce emissions and invest in cleaner aircraft and fuels.
However, Iceland has argued that the application of these rules can produce a particular distortion for Keflavík Airport, which serves as a connecting hub between Europe and North America.
A passenger travelling between an EU country and the United States through Iceland may generate ETS obligations on the European leg of the journey. Airlines offering direct services from continental Europe to North America can face different treatment because much of international aviation remains outside the current geographical scope of the EU ETS.
The Icelandic government negotiated a temporary mechanism when the revised aviation rules were incorporated into the EEA Agreement in 2023. Without an extension, the arrangement was expected to expire at the end of 2027.
In its new proposal, the Commission said it would support extending the existing mechanism for another three years. The treatment of flights between Iceland and North America would therefore remain unchanged until the end of 2030.
The measure is not a general exemption from all carbon costs. Icelandic and European flights that fall within the ordinary scope of the ETS would continue to be subject to the system.
The Iceland aviation emissions exemption matters to Icelandair
The financial consequences are particularly important for Icelandair, whose business model relies heavily on connecting passengers between Europe and North America through Keflavík.
According to figures reported by the airline, Icelandair recognised USD 110.2 million, about €96.5 million, in emissions and carbon costs between the beginning of 2022 and the end of March 2026. The amount corresponds to approximately ISK 13.6 billion, or €94.8 million.
Between 2022 and 2025 alone, the company recorded USD 102.8 million, about €90 million, in carbon and emissions costs. Over the same four-year period, Icelandair Group reported combined post-tax losses of USD 24.3 million, approximately €21.3 million.
The airline’s climate-related costs were therefore more than four times its accumulated losses during that period.
The pressure continued to grow in early 2026. Icelandair reported carbon emission costs of USD 7 million, around €6.1 million, in the first quarter, an increase of 47 percent compared with the same period in 2025.
Icelandair said it was examining the Commission’s proposals.
More support for sustainable aviation fuel
The Commission has also proposed changes to the support available for sustainable aviation fuel, or SAF.
SAF can reduce aviation’s lifecycle greenhouse gas emissions compared with conventional jet fuel, but it remains considerably more expensive. The EU ETS therefore reserves allowances to help airlines cover part of the price difference.
Iceland currently benefits from a special arrangement allowing airlines to receive compensation covering the full price difference between SAF and conventional aviation fuel until 2030.
According to Iceland’s Ministry for Foreign Affairs (Utanríkisráðuneytið), the Commission’s proposal could make this support available for flights leaving the EEA as well. This would include services from Iceland to destinations such as the United States.
The measure could make the use of cleaner fuel more financially viable on the long-distance routes that are central to Iceland’s aviation sector. However, the availability of SAF remains limited, and its higher production costs continue to restrict its wider adoption.
The proposal still needs political approval
The extension is not yet final. The European Parliament and EU member states must first agree on the wider revision of the emissions trading rules.
Icelandic authorities will then have to negotiate the formal incorporation of the relevant provisions into the EEA Agreement. The government has not indicated when the EEA Joint Committee could adopt the necessary decision.
The Icelandic Ministry for Foreign Affairs will also examine other parts of the Commission’s package, which includes changes affecting shipping and energy-intensive industries.
For Iceland, the negotiations will test how the EU can apply a common climate policy while accounting for the geographical position of an island economy that depends heavily on international aviation. Extending the special arrangement would protect Keflavík’s role as a transatlantic hub, but it will also keep the debate open over how aviation should contribute to Europe’s emissions targets.
