This paper explores the potential for ethanol production and fuel substitution in Nepal based on established sugarcane production, installed capacity for sugar and ethanol production, economic opportunities for the national economy, and potential to reduce greenhouse gas emissions. At present conditions, 18,045m3 ethanol can be annually produced in Nepal without compromising the production of food products from sugar cane such as sugar, chaku and shakhar. The effects for the country can be manifold. As much as 14% of gasoline import reduction, and annual savings of US$ 10 million could be achieved through the introduction of the E20. The activity can provide an incentive for improved yields in sugarcane production, and help develop the industrial sector. This, in turn, will have a positive effect in terms of job and income generation in the rural areas where 85% of the population live. Improvement of agricultural practices for sugarcane could also have an indirect and positive effect on improving other agriculture activities. Furthermore, the use of ethanol in the transport sector will have a positive environmental effect while reducing CO2 emissions and combating pollution in the Kathmandu Valley. Finally, the substitution of ethanol in transport will imply lower imports of oil products and less draining of resources from the Nepalese economy.