The Oil Fuel Fund Administration Office (OFFO) plans to lower the retail price of diesel B10 on Tuesday by two baht per litre to promote biodiesel.
The state will use oil funds to subsidise the price of B10 by 1.80 baht per litre and B20 biodiesel by 2.55 baht per litre.
The subsidy is to encourage the use of B10 before it replaces B7 as the mandatory diesel option at pumps starting from Jan 1.
B10 is expected to be priced at 25.99 per litre, starting next year.
The biodiesel subsidy will help absorb the huge surplus of crude palm oil, about 150,000-200,000 tonnes in the 2019 crop, with methyl ester blended with pure diesel.
OFFO director Veerapol Jirapraditkul said the subsidy was approved on Monday.
B20 is expected to be priced 22.99 baht per litre starting next year.
Mr Veerapol said B10 and B20 are being sold on a volunteer basis by oil traders. B7 will still remain available at some pumps next year because of compatibility with various European car engines, but availability is dependent on the oil traders' decisions.
OFFO has not estimated the consumption volume after the B10 and B20 subsidies come into effect next year.
As of July this year, consumption per day averages 54 million litres for B7, 13,000 litres for B10 and 6.7 million litres for B20.
Thailand is the third largest crude palm oil exporter, producing 2.90 million tonnes a year or 4% of global output.
The government is working to mitigate the palm oil price slump and needs to manage crude palm oil supply inside the country's "safe zone" at an average of 150,000-200,000 tonnes.
Mr Veerapol said OFFO's duties will cover those of the Energy Fund Administration Institute, which was abolished on Sept 24, the same day OFFO began operations.
Levy collections for the state Oil Fund will be authorised by OFFO, which will also be in charge of responding to high fluctuations in the global price of oil and cooking gas.
The fund has 38.7 billion baht in cash on hand.