Decarbonisation of transport has become central to European Union policy. Biofuels are expected to represent a substantial part of the overall strategy towards diversifying Europe's energy supplies and curbing greenhouse gas emissions in a cost-effective way. This research deals with the dynamic simulation modeling of a biodiesel market as a part of transportation fuel market and analyses of various policy support instruments on increasing the proportion of biofuel in total transport fuel demand. The study is carried out for Latvia's road transport sector. After it had experienced generous financial support from the government allowing the industry to develop, support was abruptly stopped creating stagnation in both biodiesel supply and demand. This threatened the national transport policy goals. The goal of this research is to find the most effective policy strategies for achieving the national transport policy goals by applying system dynamics modeling to the current market conditions of transport fuels. . Specifically, the primary focus of this paper is an attempt to gain insight into the long-term dynamic behavior of the biodiesel market in Latvia. The principal policy tools and mechanisms implemented can be summarized as: i) state subsidies at different levels and stages (i.e. the biodiesel production sector, the agricultural sector, and the end consumer sectors), ii) increasing the excise taxes on fossil fuels, iii) increasing the share of the biodiesel in the transportation fuel blend. The results obtained from model simulations confirm that promoting biofuel acceptance among end-users is the primary key issue.