Five per cent of petrol sold in the UK will have to come from renewable sources by 2010, under plans announced Transport Secretary Alistair Darling.
Mr Darling said it was "essential" climate change was tackled.
Mr Darling said the Renewable Transport Fuels Obligation would reduce CO2 gas emissions by one million tonnes a year.
"This will help reduce the impact of transport on climate change, and bring environmental benefits for us all."
Friends of the Earth welcomed the move but said growth in travel would offset any environmental gains by 2015.
Mr Darling announced the government's proposal at an Environmentally Friendly Vehicles Conference in Birmingham.
He said a one million tonne reduction in carbon dioxide emissions was equivalent to taking one million cars off the road.
"Making vehicles more efficient and investing in public transport are important aspects of our strategy, but renewable fuels are equally important," he said.
"This obligation is vital in continuing to promote a shift towards cleaner, low carbon road transport."
Carbon dioxide is a "greenhouse" gas, linked to global warning. Biofuels give off less greenhouse gases than conventional fossil fuels.
Many come from crops such as oilseed rape and wheat, which can be mixed with petrol or diesel for use in ordinary cars.
The UK Petroleum Industry Association (UKPIA) said biofuels had a role to play in reducing C02 emissions.
But a spokesman said emissions in the transport sector had stabilised and were predicted to fall as fuel became cleaner and vehicles more efficient.
"The approach which is being adopted is quite bureaucratic because it's going to require quite a lot of paperwork in terms of accreditation of biofuels," he said.
"For these sorts of fuels to take off, they have got to be no more expensive to the consumer than conventional petrol."
British Petroleum said it supported moves to reduce carbon emissions and had been working closely with the government to ensure the obligation was practical.
"We would want the final proposal to be something that's clearly going to make a difference to the environment but also wouldn't be an unnecessary burden on UK motorists," a spokesman said.
"We are looking forward to working with the government on the details and final implementation of the obligation."
A spokeswoman for Shell said: "Shell does not currently use any biofuels in either its diesel or gasoline fuels in the UK due to the higher costs associated with their use.
"If this is to become law in the UK then Shell always aims to comply with the law."
Total UK said it would work with the government to find the "most appropriate approach" to meet their objectives.
"Use of biofuels must be tied to a strong assurance scheme to ensure their production doesn't damage the countryside, encourage the destruction of tropical rainforests or promote intensive farming of GM crops," Friends of the Earth said.
But the Department for Transport said the government would develop a carbon and sustainability assurance scheme as part of the obligation.
"Obligated companies would be required to report on the level of carbon savings achieved and on the sustainability of their supplies," it said.
Mr Darling also said the government would further investigate the potential for the use of hydrogen fuel in the UK.
"In the longer term, we need to look seriously at the fuels we are using to power our transport - which is why we are piloting the development of hydrogen fuelled transport."