The formulation of an economical diesel/colza oil/water microemulsion fuel is reported. The modification of diesel fuel significantly improves its fuel properties as well as environmental pollution issues. To investigate the possibility of using colza oil with diesel fuel and adding water to reduce emissions of diesel combustion, the phase diagrams of the system were constructed using titration method with co‐surfactant. n‐Butanol is selected as co‐surfactant among the investigated alcohols with different chain lengths as it formed wide single phase area. Using of n‐butanol was helped to tune solubilizing of water in diesel/colza oil blend and to reduce its viscosity. Here, a 4:1 blend of diesel:colza oil, 5% water and n‐butanol was selected as base system which was then optimized to obtain a reasonably economical formulation with acceptable physical properties. According to the measurements of physical properties, such as viscosity, temperature stability, water droplet size and considering an economical point of view, the optimum microemulsion system was composed of 75% diesel/colza oil (4:1), 5% water, 10% n‐butanol, 8% Brij 30 and 2% Tween 80, and was prepared in room temperature (21–25) °C by stirring with 500 rpm for 5 min. The optimum system was stable up to 45°C. © 2017 American Institute of Chemical Engineers Environ Prog, 37: 1762–1769, 2018