The European Union has launched an ambitious policy aiming at increasing the use of biofuels in land transport “with a view to contributing to objectives such as meeting climate change commitments, environmentally friendly security of supply and promoting renewable energy sources”. Another motivation, at least for some member states, is that the development of biofuels is expected to provide larger outlets for domestic farm products and new employment opportunities in rural areas and make future adjustments of the Common agricultural policy easier. The EU policy of support to energy crops, tax exemption for biofuels and mandatory incorporation targets in some member states, has resulted in a significant increase in the demand and supply of biofuels. The market share of biofuels remains modest (1 % in 2005 in the EU-25) but has increased dramatically over the last few months. The paper provides an analysis of recent developments and prospects for the production and utilization of biofuels in the EU. Its presents the potential benefits of biofuels in the EU as well as their possible drawbacks. In particular, it addresses the three related issues of energy efficiency, environmental benefits and cost competitiveness of EU biofuels.