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Not many bathing spas would choose to locate next to an electricity plant, let alone plunge visitors into the plant's murky waters. But in Iceland, the HS Orka utility company pumps 50 L of hot brine per second into the sprawling Blue Lagoon pool, which draws more visitors a year than the country's population.

But then, there's a lot that's different on this subarctic island where 318,000 people inhabit 103,000 sq. km. (At that density, Manhattan's population would be 224.) They eat puffin. The 68-year-old Prime Minister married her female partner in June. The capital, Reykjavík, elected a comedian as mayor in May. Angry protesters outside Parliament in October tossed not blood but yogurt. "We are a little bit strange," allows Katrin Juliusdottir, the Minister of Industry, Energy and Tourism. "But strange in an interesting way."

It's no surprise, then, that Iceland has devised a different and interesting economic-recovery plan to help it climb out of the financial tar pit created by the 2008 collapse of the country's banks and muddied again when Eyjafjallajokull blew its volcanic top in April. The economy shrank 6.8% in 2009 following the banking debacle, according to Statistics Iceland. Taxpayers face a suffocating national debt. Unemployment, historically not much above 1%, hit 9.3% in February before falling to 7.1% in September. Those yogurt-hurling demonstrators (who tossed a local version called skyr) were concerned about house repossessions.

Iceland is now pushing hard to attract foreign manufacturing and get agriculture, technology and media companies to locate in the North Atlantic country. That alone is not so unusual. Nor is offering tax breaks; Parliament passed a set of them in June, including a 10-year cap on the 20% corporate rate, which is among the lowest in the world.

But the linchpin of the scheme is something few other countries could offer: clean electricity. Really clean. Iceland generates 100% of its energy from renewable hydroelectric and geothermal sources, of which it has plenty. Melting glaciers feed hydro plants, and the same forces that fuel volcanoes drive geothermal power. Iceland wants a world that's keen to abandon fossil fuels to come and take advantage.

"We want to use our clean energy as a draw," says Juliusdottir. "We need people to start investing in Iceland again." The appeal of Iceland's electricity is not just in green but also greenbacks. Its electricity is among the cheapest in the industrial world. Probably more important, in an era of energy-price volatility, utilities in Iceland set rates for as long as 20 years. Add a modern grid system that doesn't creak, and you've got an attraction even in a world where nations from Germany to China are jockeying for the clean-energy pole position.

IBM seems to think so. It's rumored to be putting a data center in a former munitions storehouse on a windswept, disused NATO naval base 47 km southwest of Reykjavík, which would connect to Europe and North America via existing sub-Atlantic fiber-optic lines. Data centers could exceed airlines as CO2 culprits by 2020, according to McKinsey, a consultancy. A chilly, year-round Icelandic location would not only provide clean power but would also eliminate much of the considerable need for electricity to cool computer rooms.

"No comment," says an IBM spokesman when asked about the center, which would reportedly rent space from Verne Global, a Reston, Va., hosting company that is retrofitting the base. In May, Norwegian browser company Opera moved into a data center in Halfnarjordur, Iceland, for electricity reasons. And in another industry, New York City-based Globe Specialty Metals looks ready to locate a plant in Iceland to make silicon for solar panels.

Foreign industrial activity is not new on the island. But much of it has tended to be quite dirty. Aluminum companies started arriving in Iceland in the 1960s. Today Alcoa, Rio Tinto Alcan and Century all operate energy-intensive smelters there. Aluminum has reached a virtual tie with fishing as the country's leading industry, and some Icelanders think it should expand further.

"I'm not against aluminum smelting in Iceland," says Juliusdottir. "But it is not a smart thing to go from being dependent on fishing like we were before to being dependent on aluminum. We need to diversify."

There are other arguments against expanding the aluminum industry. Smelters pollute even on clean electricity. And they're energy-voracious. Iceland has lots of clean power, but not an endless supply.

Also, on a jobs-per-megawatt basis, aluminum smelting employs fewer people than other industries, notes Thordur Hilmarsson, managing director of the quasi-governmental agency Invest in Iceland. So some Icelanders want to attract less-polluting industries like polysilicon and carbon fiber that put more people to work per megawatt. And data centers and carbon fiber manufacturers can create downstream jobs within the country: in support and research operations in the case of data centers and in spare parts in the case of carbon fiber. Aluminum companies, for the most part, simply export. Invest in Iceland hopes the energy hook will help create 3,500 jobs, which would wipe out at least a quarter of unemployment.

Beyond attracting new industries, Iceland envisions "green parks" of metallurgical and chemical companies in which the by-product of one plant feeds another. HS Orka and the Blue Lagoon spa exemplify this industrial conservation ethos. HS Orka's power plant in Svartsengi taps hot water from 2,000 m below for steam to drive turbines. There's enough extra water to heat local buildings and fill the Blue Lagoon. This is no industrial wastewater. Rather, it's earthy brine with a purportedly curative mix of silica, algae and bacteria. The spa attracted 413,000 visitors last year, mostly from abroad.

But Iceland has a dirty little secret. Geothermal steam emits CO2, albeit tiny amounts compared with fossil-fuel plants — about 5% of what coal-powered plants emit and 11% of what natural-gas plants do. In this conservation-minded place, though, they're always thinking about how to capture it. HS Orka plans to pipe CO2 to a nearby greenhouse where Icelandic firm ORF Genetics grows genetically modified barley for cosmetics and medical products. Another Icelandic company, Carbon Recycling, is buying CO2 from geothermal companies to mix into a form of methanol that increases gasoline efficiency.

Exactly how much more electricity the country can and should produce is hotly debated by, among others, environmentalists who oppose spoiling the wilderness with power plants and industry. Iceland's National Energy Authority says there's enough potential to triple its current 16 terawatt-hours of production. Asgeir Margeirsson, CEO of Magma Iceland, which owns HS Orka, says that's a conservative estimate. Hordur Arnarson, CEO of the country's largest power producer, Landsvirkjun, says it's high.

About 75% of Iceland's electricity today comes from hydro, the rest from geothermal. Most of the growth will be in geothermal in this geologically vibrant land, where Jules Verne started his travelers on a journey to the center of the earth. Iceland straddles two huge tectonic plates that are pulling apart, seismically loosening subsurface rock and easing the rise of heat from the planet's core — all to a power producer's delight. "I love earthquakes," quips Albert Albertsson, HS Orka's deputy CEO.

Landsvirkjun has another reason to expand electricity production: it's looking into laying an undersea high-voltage cable in order to sell green electricity to Europe. Arnarson thinks a link could be established by 2020 and would cost about $2.6 billion. Iceland could also use the cable to import inexpensive electricity at nighttime rates to power, for example, round-the-clock smelters.

"The market in Europe is very interesting to Landsvirkjun," says Arnarson. "We could sell in the daytime at high prices and buy back at nighttime at very low rates." Magma's Margeirsson adds that imported electricity could temporarily feed a new factory until a local power plant opens.

Iceland is flashing eyebrows to lure foreign companies: a shipping location within striking distance of both Europe and North America; pesticide-free conditions for agriculture; weather that's not really all that bad; an educated workforce that rarely strikes.

The country will have to settle some internal differences to realize its green dreams. Besides the environmental battles, strong-minded municipalities can stymie the national effort to attract industry, as each insists on locating power plants and businesses within their borders.

"The erupting volcanoes affect our character," says Juliusdottir. "We're quite fiery." If Icelanders can all agree on attracting industry, they might also help make a dent in the world's carbon footprint. Then, once again, Iceland will have made a difference.

This article originally appeared in the Jan. 24, 2011 issue of TIME Magazine Europe.

• MARK HALPER / REYKJAVIK
• But can renewable energy recharge the country's battered economy?