Enthusiasts even talk about it one day becoming the "Kuwait of the North" as an exporter of the new, green fuel to markets in Europe.

For Bragi Arnason, professor of chemistry at the University of Iceland in Reykjavik, better known as "Professor Hydrogen", converting his country to a fuel that produces no greenhouse gases will be a science fiction dream come true.

In the future, Iceland's cars, buses and ships will be driven by electric motors powered by hydrogen-fuel cells that produce nothing but water in their exhausts.

Unlike other countries contemplating hydrogen power, Iceland has a chance to develop a genuinely carbon dioxide-free system, since the electricity to make hydrogen from the electrolysis of water will come from hydro or geothermal power, not fossil fuel.

WAITING FOR THE BUS

Icelanders will get their first taste of the new era next year when three hydrogen-powered buses hit the road.

That is a year later than originally planned, because nine other European cities want to join in the bus experiment, requiring a bigger production run. Arnason, looking on the bright side, sees this as an endorsement of Iceland's approach.

In cities like Madrid, Amsterdam and Hamburg, hydrogen buses will represent only tinkering at the edges. For Iceland, it is the start of something much bigger.

Converting all the country's 180,000 vehicles and 2,500 fishing trawlers to hydrogen won't happen overnight - Iceland is giving itself 30-40 years to kick the oil habit completely - but the launch of the energy plan a year ago was a watershed.

The scheme is backed by DaimlerChrysler, which will build the first buses, together with energy giant Royal Dutch Shell and Norwegian industrial group Norsk Hydro

All three firms have invested in a new company called Icelandic New Energy and plan to use Iceland as a test-bed for a technology that some scientists think holds the key to mankind's energy needs after the oil runs out.

"Thirty years ago people said it was nonsense," Arnason told Reuters. "But slowly people have come round to the idea - especially with the involvement of big companies. Now, all around the world, people are starting to look at hydrogen."

While technical problems remain, the technology of fuel cells has advanced by leaps and bounds in the last 10 years.

Arnason reckons hydrogen fuel cells are now approaching competitiveness with oil.

At an oil price of $20 a barrel, Icelandic hydrogen would be two or three times as expensive as gasoline but this is balanced by the fact that fuels cells are two to three times more efficient than internal combustion engines.

ENERGY PARADOX

At first sight, it might seem odd that Iceland should be bothering with hydrogen and worrying about greenhouse emissions. After all, 93 percent of all houses are already heated by eco-friendly geothermal energy.

But Iceland's tiny population of 280,000 faces a paradox - its large fishing fleet and energy-intensive metal smelting industry make it one of the world's largest per-head producers of carbon dioxide and other greenhouse gases.

That is a major frustration for a country which takes its environmental commitments seriously, yet has few options for expanding its economy.

Switching Iceland's vehicles and ships - which today account for two-thirds of carbon dioxide emissions - from fossil fuels would give a lot more flexibility to build up industry while still meeting Kyoto Protocol guidelines.

Jon Bjorn Skulason, general manager of Icelandic New Energy, says the potential is considerable, since Iceland has so far tapped only 15 percent of its hydro and geothermal reserves.

The government is champing at the bit to expand the industrial base. Only last week, it announced the start of formal talks with Alcoa on construction of a new 320,000 tonne smelter that would double aluminium production.

STORAGE HEADACHE

With its cheap energy resources, Iceland has a chance to lead the world in the coming hydrogen economy, Skulason believes.

Running tankers full of liquid hydrogen from Iceland to markets in Europe is one option, although any surplus from the tiny domestic economy means Iceland would probably never supply more than a small European market, such as Denmark.

Meanwhile, there are some major technical issues to resolve.

Safety is one. The image of the 1937 Hindenburg airship disaster is hardly reassuring, although experts argue that hydrogen is no more explosive than gasoline and the Hindenburg's flammable casing, rather than hydrogen, was largely to blame.

But storing the lightest element in the universe in a convenient form remains a big problem.

BMW is planning to develop cars that would carry it as liquid, but most other car makers think gas under pressure makes more sense. Either way, the storage tank will be bulky.

That may be surmountable for buses but it is major headache for cars and Iceland's fishing trawlers, which need to carry enough fuel for several weeks.

One intermediate-stage option being examined in Iceland is to store hydrogen in methanol, which could be synthesised using carbon dioxide emitted by the metals industry.

It is not a perfect solution since burning the methanol would still release some greenhouse gases. But Arnason thinks it could be a useful halfway house while the country waits for long-term storage solutions, such as carbon nanotubes.