The use of biofuels is increasing as developed countries try to reduce their dependence on imported oil and cut emissions of carbon dioxide. However, critics say this practice has led to a shortage of grain, pushing up commodity prices.
"Rich countries' demands for more biofuels in their transport fuels are causing spiralling production and food inflation," Rob Bailey, Oxfam biofuel policy adviser, and author of the report said.
Oxfam called on rich countries to dismantle subsidies for biofuels and reduce import tariffs.
"Grain reserves are now at an all-time low," Bailey said.
"Rich countries spent up to $15 billion last year supporting biofuels while blocking cheaper Brazilian ethanol, which is far less damaging for global food security," the report said.
The aid agency also urged rich countries to scrap biofuel targets, including European Union plans to get 10 per cent of its transport fuel from renewable sources like biofuels by 2020.
Oxfam estimates that by 2020, carbon dioxide (CO2) emissions from change in the land-use in the palm oil sector may have reached over 3.1 billion tonnes, largely as a result of the EU target.
The group said that it would take over 46 years of biofuel use at 2020 levels to repay this "carbon debt".
"Biofuels are taking over agricultural land and forcing farming to expand into lands that are important carbon sinks, like forests and wetlands," the report said.
"This triggers the release of carbon from soil and vegetation that will take decades to repay," it said.
The EU says it plans strict criteria to ensure biofuels do not do more harm than good.