Sewage sludge liquefaction bio-oil is capturing extensive attention for its sustainability and easy availability. However, some limitations of bio-oil such as high viscosity and poor cold flow properties hamper its direct application in engines. Two microemulsions including ethanol-in-diesel (M1) and diesel microemulsion (M2) were produced to upgrade bio-oil. Adding ethanol in M1 facilitated bio-oil solubilization and improved fuel properties of bio-oil. Because of low viscosity and low pour point of ethanol, M1 with ethanol as polar phase produced a more promising biofuel with acceptable viscosity and better cold flow properties compared with M2. Through microemulsification in diesel, hydrophilic and hydrophobic bio-oil components may penetrate into the polar core and the continuous phase, respectively, while amphiphilic components mainly located at the interface. The hydrogen bonding between ethanol and hydrophilic bio-oil components could enhance solubility and improve stability. Besides, polar phase ethanol could also act as a solvent to dissolve more less-hydrophilic bio-oil components into the polar core.