Efficiently managing agricultural plant residues is a growing concern, leading to a focus on converting waste materials into valuable resources. The Rutaceae family, especially Citrus maxima peel oil (CMPO), has potential for biofuel production, but research on its use remains limited, especially in terms of fuel modification. This study aims to extract biofuel from Citrus maxima peel and characterize its chemical components. To enhance efficiency and align with environmental goals, the study suggests integrating water and a nanocomposite into CMPO. An eco-friendly method was employed to synthesize a carbon nanotube (CNT)-induced magnesium oxide (MgO) nanocomposite that was extensively characterized. Fuel combinations were derived using a Box-Behnken design matrix, and optimization followed, emphasizing performance and emission parameters. Analysis of the elemental composition and free fatty acid profile of extracted CMPO highlights its potential as an alternative fuel. Optimal concentrations of CMPO, water, and nanocomposite in diesel fuel were found to be 27.6, 12.2, and 64.9 ppm, respectively. Confirmation tests validated improved performance and emission outcomes under these optimal conditions. Projected performance and emission parameters closely align with experimental findings. The proposed fuel combination is expected to achieve a significant 40 reduction in the demand for petroleum derivatives. © 2024 The Authors