Biofuel is fuel derived from living matter called biomass (usually plant matter). Examples of biofuels include but are not limited to biodiesel, ethanol, and vegetable oil. Since biofuel is obatained from current plant growth, they are considered a renewable source of energy. However, whether or not biofuels are sustainable is a difficult topic to address (please see renewable and sustainable energy).
Ethanol is the most common biofuel in North America, as most gasoline contains up to 10% ethanol. This fuel is referred to as E10, where the number refers to the percentage of ethanol in the fuel. Flex fuel vehicles are capable of running up to E85. The remaining 15% of fuel must be gasoline as ethanol is harder to ignite in engines.
Using biofuels in an engine still produces carbon dioxide. However, since they're derived from recent biomass which took in CO2 as it was growing, the CO2 released in combustion is the "same" as they took in. This makes biofuels far closer to carbon neutral (no net release of carbon dioxide to the atmosphere) than fossil fuels. Any remaining descrepancies between the input and output CO2 of biofuels need careful life cycle analysis to be measured.
Biofuels and fossil fuels (coal, oil and natural gas) are both derived from organic matter, but differ in how recently the organic matter died. Fossil fuels come from organic matter that died millions of years ago (see the time scale of the universe page), whereas biofuels come from recently deceased matter.
From a climate change perspective, biofuels release just as much carbon dioxide as fossil fuels. However, since the CO2 from biofuels came from the atmosphere recently it doesn't change the amount of carbon circulating through the carbon cycle. In this cycle, the carbon exists in the atmosphere, ocean and biosphere, as opposed to the Earth's solidified carbon supply—where fossil fuels come from. Conversely, fossil fuels are releasing stored CO2, so burning them increases the amount of carbon dioxide in the carbon cycle. So while replacing fossil fuels with biofuels won't decrease the CO2 emissions from a car's tailpipe, it will drastically decrease the net CO2 emissions.