Major objectives of this study were to produce low‐emitting wood pellet biofuel from selected agro‐forest tree species, i.e., Kikar (Acacia nilotica), Oak (Quercus semicarpifolia), and Mesquite (Prosopis juliflora), grown in the southern part of the Khyber Pakhtunkhwa (KP) province of Pakistan using indigenously developed technology (pelletizer machine). Primary raw material, such as sawdust of the selected agro‐forest tree species, was obtained from sawmills located in southern part of KP. Life cycle inventory (LCI) was sourced for entire production chain of the wood pellet biofuel by measuring quantities of various inputs consumed and output produced. In addition, the wood pellets were characterized to examine diameter, length, moisture content, ash content, bulk density, high heating value (HHV), low heating value (LHV), as well as nitrogen and sulphur contents. A comprehensive life cycle assessment was performed for wood pellet biofuel production chain using SimaPro v9.1 software. A functional unit of one (01) kilogram (kg) wood pellet biofuel was applied following a gate‐to‐gate approach. The results of the present study were in accordance with the recommended Italian standard CTI‐R 04/5 except for pellet bulk density and nitrogen content. The bulk density for all wood pellets, manufactured from the saw dust of three different agro‐forest tree species, were lower than the recommended Italian standard, while for nitrogen content, the results were higher than the recommended Italian standard. Among the environmental impacts, Kikar (Acacia nilotica) wood pellets were the major contributor to fossil fuel depletion, followed by ecotoxicity, mineral depletion and acidification/eutrophication. This was primarily due to lubricating oil and urea‐formaldehyde (UF) resin used as inputs in the wood pellets biofuel manufacture. Likewise, human health and ecosystem quality was also affected by lubricating oil, UF resin, and saw dust, respectively. In cumulative exergy demand of 1 kg wood pellets biofuel, the highest impact was from Kikar wood pellets for non‐renewable fossils, mainly due to lubricating oil used. Difference in environmental impacts, damage assessment, and exergy were examined in three different scenarios for major hotspot inputs by reducing 20% lubricating oil in case 1, 20% UF resin in case 2, and without usage of UF resin in case 3, while marked reduction was observed in ecotoxicity, fossil fuel, and mineral depletion, as well as acidification/eutrophication impact category. Moreover, a pronounced reduction was also noted in the non‐renewable fossil fuel category of cumulative exergy demand of one kg of wood pellets biofuel produced.