European Union supports alternative fuels, in particular, biofuels to comply with the triple objective of reducing greenhouse gases emissions, diversifying fuel supply and developing long-term replacements for fossil fuels. The European Community set the goal to substitute 20% of the fossil fuels for road transport with alternative fuels by 2020 but the present market penetration of the biofuels is still very low. To support the market transition from conventional to alternative fuels, policies have been taken in the past and are defined at present, but many uncertainties remaining. It is crucial to provide an assessment of the effectiveness of policy measures and to investigate the appropriate policy recommendations to support market transition to alternative fuels. This paper surveys and discusses European Union energy markets and the instruments to promote biofuels, including policies, legislation and provision for possible tax exemptions or reductions for renewable energy sources. The circumstances of biofuels in Portugal are also analysed.