Diesel is essentially a hydrocarbon, so water and CO2 can provide all the elements required.
The normal problem is that the cheapest/easiest source of hydrogen is from the stream reformation[1] of natural gas, but here there are using high temperature electrolysis[2] of water powered from green energy (they don't seem to specify exactly what this is).
The CO2 comes from atmospheric capture using a device from Climeworks[3], and biogas. This is CO2 neutral as all this CO2 is either in the atmosphere already, or will naturally end up in the atmosphere.
This is of course a very small-scale pilot by Audi, but I've often thought that using hydrocarbon fuels manufactured from atmospheric CO2 and water might be an excellent solution for transport and space heating.
We have all the infrastructure for distributing these fuels, they are manufacturable using something like solar energy, and can be easily stored and transported themselves.
[1] http://en.wikipedia.org/wiki/Steam_reforming
[2] http://en.wikipedia.org/wiki/High-temperature_electrolysis
[3] http://www.climeworks.com/
