Biofuels have recently emerged as a major issue in energy policy, agricultural development and natural resource management. The growing demand for biofuels is being driven by high oil prices, energy security concerns and global climate change. In Tanzania there is growing interest on the part of foreign private investors in establishing biofuel projects, although globally there are concerns related to biofuel investments. Tanzania has approved a number of such projects, but the biofuel subsector faces several policy challenges that could clearly hamper its development. These include the lack of a holistic and comprehensive energy policy that addresses the broad spectrum of energy options and issues, and weak or absent institutional and legal frameworks. This article highlights some key policy issues critical to the development of biofuels and argues that if these challenges are not addressed at the national policy level, biofuel development may not result in the expected benefits to Tanzania and the majority of its local communities.