Note:  Lead Energy Economist, Asian Development Bank. The opinions refl ected in this paper do not represent the views or the policies of the Asian Development Bank.
Abstract: In recent times, biofuels are receiving increased attention because they have the potential to enhance the energy security of energy deficit nations while reducing greenhouse gas emissions. They also provide opportunities for inclusive rural development. This paper shows that prevailing administered prices do not provide adequate financial incentives to produce biodiesel in India. In contrast to financial analysis results, social cost–benefit analysis shows that biodiesel production from jatropha and pongamia is economically viable. This paper illustrates that financial analysis results may not provide a sound basis for pubic policy, particularly when there are distortions in the market. Biodiesel has the potential to significantly generate rural employment and reduce greenhouse gas emissions. If the production is limited only to wastelands, in meeting 20 per cent blending target, biodiesel would not affect food production in India. While explaining the reasons for failure of biodiesel production taking off in a big way in India, the paper argues that public sector interventions are necessary to correct existing market, non-market, and institutional failures, which prevent development of biodiesel markets.