The invention discloses an environment-friendly sludge compound briquette fuel and a preparation method thereof. The method comprises the steps of firstly, carrying out sludge dewatering pretreatment; uniformly mixing shell powder, aluminum powder and biomass powder to obtain a conditioner; then, cutting the dewatered sludge, mixing the dewatered sludge and the conditioner, pressing the mixture to form a granular material, drying, then, immersing the granular material into a layer of waste oil, and airing to obtain the environment-friendly sludge compound briquette fuel. The environment-friendly sludge compound briquette fuel is high in compressive strength larger than 95kPa and drop strength larger than 95% which are both far higher than the mechanical performance of briquette coal; the sulfur and chlorine fixation effects are good and can be respectively up to 85.4% and 87.8%; the calorific value can be up to 5025 kilocalories; the wet strength is up to 54.6kPa, the ignition point is reduced to 240 DEG C, the moisture resistance and waterproofness are remarkably improved, and the inflammability is enhanced; aluminum powder and combusting metal oxides can be subjected to reaction similar to aluminothermic reaction, so that the complete combustion of carbon granules is accelerated, reductive pollution gases are prevented from being generated, and the combustion activity is high; and in addition, the preparation method has the advantages of simplicity in operation, easiness for obtaining raw materials, low cost, little environment pollution and the like.