The complaint in that article is that "instead of creating a single European system, the PPWR preserves a fragmented national model. A business selling directly to customers across the EU must register and fulfil its obligations separately in every Member State where its packaging becomes waste. For large companies, this is part of the cost of doing business; for micro-businesses selling only a handful of products into each country, the cost and administrative burden can be wildly disproportionate to the amount of packaging involved."

That is not the EU passing bad laws that members are forced to adopt, it's every member state individually deciding that they don't care about microbusinesses that can't even afford the registration fee for their national packaging waste disposal system.

Generally, the EU is a platform for coordination and negotiation between member state governments. So the danger for Icelanders wouldn't be that the Icelandic government is overpowered by the rest of the EU, but that they voluntarily sign up to a deal that benefits some constituencies at the expense of others, and that can't be changed easily anymore because it's now part of an international agreement. That the referendum was rejected is also an indication that Icelanders don't trust their government to negotiate on their behalf.