This paper investigates the effect of ethanol addition and hot exhaust gas recirculation (EGR) on engine performance, exhaust emissions, and air-pollution damage-cost in a dual-fuel diesel engine. The ethanol is injected at low pressure into the intake manifold using a port-fuel injector while diesel fuel is injected directly into the cylinder. Only the duration of the ethanol injection is changed in the dual-fuel injection system while the diesel injection parameters are not changed. Ethanol fuel is added by port injection in such amounts as to provide additional heat energy in the range of 0–40% to the heat energy of the diesel fuel taken to the engine for any engine operating conditions. Moreover, 5%, 10%, and 15% rates exhaust gas recirculation (hot EGR) for each engine operating conditions are applied. The engine is operated at 1400, 1600, 1800 and 2000 rpm engine speeds at full load (≈40 Nm). In this paper, the highest improvement in engine performance and environmental factors is obtained with ethanol addition of 40% without the hot EGR at 1400 rpm. Under these conditions, the brake engine power (BEP) and brake engine torque (BET) increase of 6.9% and 8.1% while NOx emission and air-pollution damage-cost decreased of 32% and 23.9%, respectively. However, CO, HC, and smoke (FSN number) emissions increased significantly. On the other hand, the brake thermal efficiency (BTE) and brake specific energy consumption (BSEC) are negatively affected by the ethanol addition and hot EGR.