Nepal depends entirely on imports for meeting its demand for petroleum products, which account for the largest share in total import volume. Diesel is the main petroleum product consumed in the country and accounts for 38 per cent of the total national CO2 emissions from fuel consumption. There is a general perception that the country would economically benefit if part of imported diesel is substituted with domestically produced Jatropha-based biodiesel. This study finds that the economics of Jatropha-based biodiesel depend on several factors, such as diesel price, yield of Jatropha seeds per hectare and availability of markets for production byproducts, such as glycerol and Jatropha cake. Under the scenarios the authors considered, Jatropha biodiesel is unlikely to be economically competitive in Nepal unless seed yields per hectare are implausibly large and high returns can be obtained from byproduct markets that do not yet exist. In the absence of byproduct markets, even earnings from a carbon credit do not help Jatropha biodiesel compete with diesel unless the credit value exceeds US$50/tCO2, and Jatropha seed yield is at or above the midrange of the scenarios considered. Declines in diesel prices from the levels observed in 2009–2013 only compound the economic competitiveness issue, according to the authors.