This paper presents the development and use of an optimisation model suitable for analysis of biofuel production scenarios in the EU, with the aim of examining second generation biofuel production. Two policy instruments are considered - targeted biofuel support and a CO2 cost. The results show that over 3% of the total transport fuel demand can be met by second generation biofuels at a cost of approximately 65-73 EUR/MWh. With current energy prices, this demands biofuel support comparable to existing tax exemptions (around 30 EUR/MWh), or a CO2 cost of around 60 EUR/t(CO2). Parameters having large effect on biofuel production include feedstock availability, fossil fuel price and capital costs. It is concluded that in order to avoid suboptimal energy systems, heat and electricity applications should also be included when evaluating optimal bioenergy use. It is also concluded that while forceful policies promoting biofuels may lead to a high biofuel share at reasonable costs, this is not a certain path towards maximised CO2 emission mitigation. Policies aiming to promote the use of bioenergy thus need to be carefully designed in order to avoid conflicts between different parts of the EU targets for renewable energy and CO2 emission mitigation. (C) 2012 Elsevier Ltd. All rights reserved.