A diesel without EGR always runs lean or with a surplus of oxygen. If you build a very hot fire during the combustion process, all the carbon in fuel gets converted to CO₂. We are still left with unused oxygen and some of that combines with the nearly inert N that is in the air the engine inhales and we have NOx as part of the exhaust gasses. If the fire isn't hot enough to literally burn some of the N, NOx isn't as big a problem.
As for the water jacket temps compared to the finned jugs, you have just stumbled on why higher cooling jacket temps makes an engine more efficient. If you cool the cylinder sleeve to 200° and only cool the finned jug to 300°, then when you light the fire in the cylinder, more of the heat and expanding gasses are used to reheat the cylinder to the point where it begins to make energy than will be used in a cylinder that is already 100°+ hotter than the liquid cooled version. Air-Diesel wins here.