Lesley Riddoch - Chilling decisions that imperil Iceland's reputation

The kroner has fallen to its lowest-ever level against the euro (down 50 per cent in 12 months). And admirers of the plucky, carbon-neutral Vikings are shifting uneasily after a series of green gaffes that have dented Iceland's image as the proud protector of wild animals and wild places.

Last week, Icelandic police killed a polar bear that had travelled hundreds of miles from Greenland on an ice floe – the second such polar arrival in two weeks.

There was an outcry when the first starving bear was shot by police who claimed they weren't equipped to catch the animal safely. This time the aim was to capture the animal and ship it back to Greenland. But the female bear charged a group of reporters, and police had "no other choice" but to kill it. A Polar Bear Taskforce has been formed to scour the coastline and move in fast with tranquillisers and a cage the next time an exhausted bear arrives. But it's hard to erase the image of blood-stained, emaciated bear corpses that dominated front pages in Iceland last week. Noble beasts killed by scared, ill-equipped trigger-happy humans, survivors of climate change killed by the agents of global warming.

As dead polar bears dominated the front pages, Icelandic whalers slipped out of port to begin their controversial hunt for 40 Minke whales. The International Whaling Commission estimates North Atlantic numbers to be 174,000 so the relatively small catch will not threaten the species. But fierce international protest made the Fisheries Ministry cut the quota and delay a final decision – indications the Icelandic government is at a crossroads. Not only are whale-watching and eco-tourism more profitable than whale fishing, there's a small matter of national pride at stake.

Earning a reputation for killing polar bears and minke whales doesn't sit well with Iceland's title as the world's most peaceful society.

As Scotland "celebrates" news that millions will be spent to recruit counter-terrorism experts, Iceland celebrates the 35th birthday of its only military weapon – the trawler wire-cutters used during the Cod Wars. Icelanders pride themselves on a peaceful, rational approach to life. According to the UN Human Development Index, Iceland is the world's most developed country (male life expectancy at 81 is the highest in the world) and one of the most egalitarian (they read more books per capita than anywhere else). And in Leicester University's Happiness Survey, Icelanders were judged to be the fourth happiest nation on earth.

A creative, optimistic outlook isn't an optional extra in a country of just 316,000 people on an island so bleak it was discovered three times before anyone stayed – and used to simulate moon walks by Neil Armstrong and the Apollo crews. Less than 1 per cent of the island is arable land. Less than a quarter of the island is vegetated. But despite all the odds – and even inflation, fuelled by the credit crunch – Iceland's population is young and rising.

And faintly appalled by decisions like Karahnjukar – the 190 metre high dam which has flooded 57 square kilometres and displaced populations of pink-footed geese and herds of reindeer. The hydro energy won't reduce local energy bills – which would have been a popular move because east Iceland is outside the volcanically active area that produces "free" geothermal heat. Instead the electricity has been "sold" to Alcoa, one of the world's biggest aluminium companies and carbon creators.

But anti-dam campaigners are unbowed by defeat. According to Elfa Hlin Petursdottir, a young historian and museum curator in East Iceland: "Karahnjukar has a huge boring drill – we could use it to drill tunnels through the mountains to link up our five fjord communities – so we need a project agreed fast while the equipment is still here."

Quick thinking and opportunism are part of the Icelandic psyche. In 1944 islanders took advantage of Danish occupation to declare independence. Ten years ago, a small group of women in the East Iceland fjord town of Seydisfjordur stopped a project to demolish old Nordic wooden and tin buildings at the pier to create a sterile new harbour. Now the refurbished buildings house hotels, museums and young families and the village is planning to use spare hydro capacity to set up internet server farms, and offer UN emergency vessels free access to their copious fresh water supplies. Four years ago Elfa and her family seized the chance to buy a 3,000 hectare estate "for the price of a Land Rover" 17km beyond Seydisfjordur and created the private nature and heritage reserve of Skalanes. Not only are these "amateurs" managing their native arctic tern and eider duck colonies successfully, they have boldly gone where "professional" conservationists fear to tread, exploring local archaeology, culture, place names, genealogy, wildlife and botany in one combined heritage project.

Aided by teams of volunteer zoologists from Glasgow University and Scottish heritage experts, the energetic new owners of Skalanes have cheerfully cut across funding streams, bureaucracies, specialisms, national boundaries and areas of expertise to offer a new model of human and natural development in very harsh northern climes.

All of this raises a challenge to Icelandic politicians – and to governments everywhere. Why is it hard for archaeologists, botanists, zoologists, historians, genealogists, linguists and community activists to work together? Divided, their conservation efforts often appear expensive, exclusive and easily outgunned by development interests. Working together, conservationists can restore civic pride, create jobs, and focus community spirit – and ensure the world's most peaceful politicians don't rest on their Viking laurels.