Bio-hydrogenated diesel (BHD) produced from two different raw materials—palm oil fatty acid distillate and fatty acid methyl ester—was compared in terms of environmental impacts using the life cycle assessment (LCA) technique with the SimaPro 7.3 software. The energy consumption, greenhouse gas emission, and environmental impacts reported in unit points (Pt.) were assessed using the Eco-indicator 95, IPCC 2007, and CML 2 Baseline 2000 methodologies, respectively. The functional unit was 1 kg of biofuel product. The system boundary defined included three main processes in the bio-hydrogenated diesel production phase—catalytic hydroprocessing, separation, and upgrading. The results indicated that the energy consumption of bio-hydrogenated diesel production from palm oil fatty acid distillate was 1.26 times (or 9.69 × 10−3 MJ higher) that of the bio-hydrogenated diesel production from fatty acid methyl ester. On the other hand, the greenhouse gas emission from bio-hydrogenated diesel production from palm oil fatty acid distillate was 2.29 times lower than that from fatty acid methyl ester due to the palm trees absorption of CO2 for photosynthesis being greater than the amount released into the atmosphere during the oil palm cultivation stage. The major contributor was crude palm oil as a feedstock to produce either palm oil fatty acid distillate (physical refining) or fatty acid methyl ester (transesterification), which were about 93% and 84% of the total energy consumption and greenhouse gas emission, respectively. The results of environmental impacts showed that the bio-hydrogenated diesel production from palm oil fatty acid distillate was 1.37 times (2.05 × 10−12 Pt) greater than that from fatty acid methyl ester. Consumption of palm oil fatty acid distillate and fatty acid methyl ester in both processes made the largest contribution to most environmental impacts (99% of the total impact score was from both processes). The main impacts of both bio-hydrogenated diesel production from palm oil fatty acid distillate and fatty acid methyl ester were the terrestrial ecotoxicity potential, fresh water aquatic ecotoxicity potential, and marine aquatic ecotoxicity potential. An essential factor which caused these impacts was the use of crude palm oil during the production of palm oil fatty acid distillate and fatty acid methyl ester. Therefore, fatty acid methyl ester was found to be a suitable raw material for bio-hydrogenated diesel production based on the economic evaluation and the lower environmental impacts during the production stage. This present work highlights the benefit of by-products as feedstock for alternative fuel production in order to increase the by-product marketing value.