Biodiesel is generally considered "climate neutral" because all of the carbon dioxide released during consumption had been sequestered out of the atmosphere during crop growth. An immediate difference for biodiesel users is in this context perhaps the smell of the exhaust gas, which is much better than from engines, that burn conventional diesel. In fact, the emissions are indeed much lower, especially of unburned hydrocarbons and carbon monoxide. This is because about 11% of pure biodiesel’s weight is oxygen, which improves combustion. Furthermore, the higher cetane index of biodiesel cleans up particulate emissions if compared to petroleum diesel. On the other hand oxygenated fuels such as biodiesel also tend to increase nitrogen oxide emissions.

On combustion biodiesel emits approximately the same amount of carbon dioxide (CO2) as the plant absorbed during growth through photosynthesis (closed CO2 circulation). In the manufacturing of petroleum diesel on the other hand, carbon is introduced that was previously sequestered in the earth’s crust. Therefore biodiesel reduces emissions of carbon monoxide (CO) by approximately 50% and carbon dioxide (CO2) by 78% on a net lifecycle basis. Even if waste products such as yellow grease as opposed to virgin vegetable oils are used, the amount of CO2 involved is still lower.

Biodiesel contains fewer aromatic hydrocarbons (56% reduction of benzofluoranthene and 71% reduction of Benzopyrene) but, because of its oxygenated nature, it also produces more nitrogen oxide emissions than standard diesel fuel. As oxides of nitrogen and hydrocarbons are both ozone precursors, the question of whether the use of biodiesel actually increases or decreases ground-level ozone on balance, is still being analyzed. However, additives already exist, which prevent increases in nitrogen oxide emissions.

Compared with low-sulfur diesel biodiesel can reduce the direct emission of particulates on vehicles with particulate filters by as much as 20%. Particulate emissions as the result of production are reduced by around 50%, compared with fossil-sourced diesel.

Biodiesel is almost entirely non-sulfuric (< 0.001%). During combustion the emission of sulfur is around 90% lower than compared with petroleum diesel.