Interest in using alternative fuels gained momentum in the 1970s as a result of the oil crisis. However, at that time its economics did not appear favourable and this inhibited commercial development. Increased interest and successful commercial use of alternative energy sources has emerged in the 1990s throughout the EU. The stimulus for this renewed interest in alternative fuels is three dimensional, arising from changing policy stances in the fields of agriculture, energy and the environment. Surplus food production within Europe, a phenomenon of the 1980s, led to the introduction of an input-control policy mechanism known as ‘setaside1. Included in the 'set-aside’ regulations is a provision for the cultivation of non-food uses on the land which has been set-aside. These include the production of biofuels, a biomass alternative to oil fuels in the transport sector. Arising from concern over the depletion of fossil fuel resources the concept of 'sustainability' is being increasingly reflected in international energy policy. Similarly, concern for the quality and future of the environment forms an important part of public policy. The EU is currently committed to stabilising C02 emissions at 1990 levels by the year 2000. Transport is a significant source of C02 emissions. Urban pollution has also been recognised as a major contributor to acid rain and global warming. ‘Biodiesel’, the commercial term for rape-methyl-ester and classified as a biofuel, is seen as one part of an overall solution to above mentioned problems. Oilseed-rape can be grown on set-aside land, and if mixed with methanol can produce an automotive fuel for conventional diesel engines without engine modification. Biodiesel is a renewable fuel and often referred to as 'CO neutral', which means that the carbon dioxide 2 1 emitted during combustion is equivalent to that taken up by cultivating the crop. The question remains, can this fuel be economically produced? In present circumstances, not without a fiscal advantage in the form of a reduction in mineral oil taxation. This study, following a review of background and issues, aims to show, by comparative analysis applied to the Irish situation, that a reduction in excise duty will result in the short-run. In the longer run, however, the study illustrates that there are potential positive benefits in output, employment and the balance of trade.