This paper attempts to draw a comparative review on engine emission and performance characteristics for biodiesel and water-emulsified diesel (WED) as CI engine fuels. Data available in the literature indicate that both of the alternative fuels cut down smoke emission from exhaust gas significantly. In the studies of blended biodiesel, NOx emission is found to increase in general, but some of them have shown reverse trends also. Water-emulsified diesel invariably exhibits reduced NOx emission, and it reduces further, up to a staggering 83% using WED containing 30% water. Amongst the engine performance parameters, the thermal efficiency is decreased using biodiesel due to its low calorific value compared to neat diesel. Though water-emulsified diesel also has a lower calorific value compared to neat diesel, an improved combustion due to secondary atomization caused by micro-explosions of water particles dispersed in emulsion, resulting in higher break thermal efficiency. Thus, using WED containing 10% water increases thermal efficiency up to 14.2% than neat diesel. Pollutants in the exhaust gas are found to be less for both biodiesel and water-emulsified diesel in majority of the experimental outcomes. However, low calorific value of biodiesel and short shelf life of water-emulsified diesel are some concerns that deter industry to adopt these at mass scale. Further research and development in this field can definitely change the outlook towards alternative to diesel fuel.