The high price of different biodiesels and the need for many of their raw ingredients as food materials are the main constraints to be overcome when seeking the best potential alternative fuels to petro-diesel. Apart from that, some properties like high density, viscosity and acid value along with low cloud and pour points preclude their use in compression ignition (CI) engines as these properties can cause serious damage to the parts of the engine and reduce engine life. In this experiment, biodiesel was produced from the oil of unused algae by a two-step ‘acid esterification followed by transesterification’ procedure. Taguchi’s method was applied to design the experiment, and a L25 orthogonal array was prepared to optimize the biodiesel production procedure. The optimized conditions for transesterification were: methanol to oil molar ratio of 6:1, catalyst (KOH) concentration of 2.5 wt%, reaction time of 90 min and reaction temperature of 50 ℃, achieving a biodiesel production of 89.7% with free fatty acid content of 0.25%. It was found that the CI engine emitted less CO, CO₂ and hydrocarbon and higher NO_x using algal biodiesel than that using petro-diesel. All properties of the algal biodiesel were within the limit of ASTM standards.