The transition toward sustainable biofuel systems requires a multidimensional approach that integrates policy frameworks, sustainability assessment, and environmental performance analysis. Studies on biofuel development often focus on individual aspects such as feedstock optimization, life cycle emissions, or blending mandated. Few have attempted a comprehensive synthesis bridging these critical domains. This review addresses that gap by systematically examining global and regional biofuel policy instruments, evaluating sustainability metrics across environmental, economic, and social dimensions, and assessing environmental impacts using life cycle assessment, indirect land use change, and biodiversity frameworks. Additionally, the study explores integrative tools such as the water–energy–food–biodiversity nexus, industrial symbiosis, and multi-criteria decision analysis as pathways to optimize trade-offs and enhances stakeholder participation. Drawing from different articles and policy documents, this work develops a unified analytical framework and policy research roadmap to guide decision-making in the biofuel sector. The findings highlight the need for harmonized certification, expanded social LCA, circular bioeconomy integration, and adaptive governance strategies that align national goals with global sustainability targets.