Using biodiesel in diesel engines is beneficial for reducing emissions of carbon monoxide (CO), hydrocarbons (HC) and particulate matters (PM). Biodiesel is usually produced from vegetable oils or animal fats. When produced from plant oil or woody plant sources, biodiesel can reduce a significant amount of carbon dioxide on a life cycle basis. The objective of this study is to produce biodiesel from a non-conventional woody plant source that is, crude tall oil, which is a dark brown viscous liquid extracted and processed in wood pulping plants. It contains a high percentage of fatty acids. From raw crude tall oil, tall oil fatty acids were separated and were successfully used for the production of biodiesel in this study. Although biodiesel produces lower CO, HC and PM than petroleum diesel fuel, it produces higher oxides of nitrogen (NOx) emissions in diesel engines. Water emulsifications of diesel-biodiesel blends are investigated in a direct injection (DI) diesel engine in this work to understand their potential for NOx reduction. When using 10% water in the emulsions, NOx was reduced by nearly 15%. In aldehyde emissions, B100 showed 35% lower aldehydes and B100 with 10% water emulsion produced nearly 90% lower aldehydes than diesel fuel—a substantial reduction. Therefore, this study accomplished the desired goal of producing biodiesel from a non-conventional source, which satisfies ASTM biodiesel standard and results in lower NOx and aldehydes emissions with water emulsifications of diesel-biodiesel blends in a diesel engine compared to that of diesel fuel.