This study investigates hydrogen combustion in an argon–oxygen environment for argon power cycle application using computational fluid dynamics. The numerical framework, developed based on previously validated model, is applied to examine the influence of key operating parameters on combustion efficiency and indicated efficiency under constant cycle pressure conditions. A parametric analysis is conducted to evaluate the effects of excess oxygen ratio, argon rate, start of injection, and injector discharge coefficient on ignition characteristics, combustion efficiency, and engine performance. The results indicate that less fuel injection improves combustion efficiency but leads to a significant reduction in engine load. Increasing the argon rate enhances engine thermal efficiency, primarily due to the higher specific heat ratio of argon, which improves the thermodynamic efficiency of the cycle. However, elevated argon concentrations significantly reduce combustion efficiency because of limited oxygen availability, resulting in increased levels of unburned hydrogen. The analysis further demonstrates that higher injector flow rates improve both combustion and engine efficiency. Overall, unburned hydrogen is identified as a critical limitation for the practical implementation of compression ignition hydrogen engines operating in Ar–O₂ mixtures; however, unburned hydrogen levels up to approximately 8% can be tolerated without significant deterioration in combustion efficiency in next engine cycle. The results revealed that the combustion inefficiency arises due to tale combustion phase and is attributed to inappropriate mixing of fuel and oxidizer.