Iceland has begun collecting a distance-based charge for electric and plug-in hybrid vehicles, a policy aimed at replacing fuel excise revenue as more cars plug into the grid. Authorities plan to extend the system to all vehicles, and industry leaders warn the change could alter how visitors travel the island and how rental firms price and operate their fleets.
How the tax works and why it was introduced
The new levy is applied per kilometre driven rather than through fuel prices. Policymakers argue this change is a pragmatic response to shrinking fuel-tax receipts as the national vehicle fleet electrifies, and a way to ensure road maintenance is funded fairly by those who use the network most. The charge started this year for electric and plug-in hybrids, with a rollout to conventional petrol and diesel cars scheduled for the following year, broadening the policy to every driver.
For businesses that supply cars to tourists, the effect is immediate and twofold. Operators face an extra compliance task, recording distance for thousands of hires, and they may need new systems to capture, report, and rebill mileage. At the same time, the extra cost per kilometre is likely to be reflected in rental rates, adding to the existing daily fees, insurance products, and energy or fuel costs.
Industry reaction and operational headaches
Representatives from Iceland’s travel sector have voiced serious reservations about both the pace of implementation and the practical consequences. The head of a major trade association has warned that adding a per-kilometre fee will make Iceland less competitive if the price of driving rises sharply for visitors. Rental companies point to the administrative complexity of tracking each vehicle’s distance, reconciling that with rental contracts, and presenting clear bills to international customers unfamiliar with such a charge.
Fleet managers also highlight the capital already invested in electrifying their cars. The switch to battery vehicles required substantial purchasing and charging infrastructure costs. Introducing a separate distance tax could compress margins further unless firms pass the entire cost to renters. Smaller operators, who lack sophisticated telematics or billing platforms, may struggle more than larger companies to absorb or implement the changes.
