PD-L1 expression on parenchymal cells mediates peripheral T cell tolerance. This study investigates the roles of PD-L1 and PD-L2 in regulating T cell activation and tolerance. PD-L1 and PD-L2 are ligands of PD-1, an inhibitory receptor on activated lymphocytes. PD-L1 is expressed on hematopoietic and parenchymal cells, including pancreatic islet cells, while PD-L2 is restricted to macrophages and dendritic cells. Mice lacking both PD-L1 and PD-L2 (PD-L1/PD-L2 -/- mice) develop a rapid onset of autoimmune diabetes on the NOD background. PD-L1 has a unique role in controlling self-reactive T cells in the pancreas. PD-L1 expression in islets protects against immunopathology after transplantation of syngeneic islets into diabetic recipients. PD-L1 inhibits pathogenic self-reactive CD4+ T cell-mediated tissue destruction and effector cytokine production. These data provide evidence that PD-L1 expression on parenchymal cells rather than hematopoietic cells protects against autoimmune diabetes and point to a novel role for PD-1–PD-L1 interactions in mediating tissue tolerance. PD-L1 and PD-L2 have overlapping roles in inhibiting CD4+ T cell effector cytokine production in lymphoid tissues, particularly in limiting IFN-γ production. However, PD-L1 has a unique role in inhibiting self-reactive T cell responses and protecting the pancreas from T cell-mediated tissue damage. Thus, PD-L1 is a key mediator of tissue tolerance. The study shows that PD-L1 expression on parenchymal cells is uniquely responsible for the increased onset and penetrance of autoimmune diabetes in PD-L1/PD-L2 -/- NOD mice. The findings suggest that PD-L1 expression on islet cells is important in controlling tolerance. The study also demonstrates that PD-L1 can regulate the initial activation of potentially pathogenic T cells as well as the responses of pathogenic effector T cells. These findings give impetus to the development of therapeutic approaches that exploit the PD-1–PD-L1 pathway for controlling diabetes and/or islet transplant rejection.PD-L1 expression on parenchymal cells mediates peripheral T cell tolerance. This study investigates the roles of PD-L1 and PD-L2 in regulating T cell activation and tolerance. PD-L1 and PD-L2 are ligands of PD-1, an inhibitory receptor on activated lymphocytes. PD-L1 is expressed on hematopoietic and parenchymal cells, including pancreatic islet cells, while PD-L2 is restricted to macrophages and dendritic cells. Mice lacking both PD-L1 and PD-L2 (PD-L1/PD-L2 -/- mice) develop a rapid onset of autoimmune diabetes on the NOD background. PD-L1 has a unique role in controlling self-reactive T cells in the pancreas. PD-L1 expression in islets protects against immunopathology after transplantation of syngeneic islets into diabetic recipients. PD-L1 inhibits pathogenic self-reactive CD4+ T cell-mediated tissue destruction and effector cytokine production. These data provide evidence that PD-L1 expression on parenchymal cells rather than hematopoietic cells protects against autoimmune diabetes and point to a novel role for PD-1–PD-L1 interactions in mediating tissue tolerance. PD-L1 and PD-L2 have overlapping roles in inhibiting CD4+ T cell effector cytokine production in lymphoid tissues, particularly in limiting IFN-γ production. However, PD-L1 has a unique role in inhibiting self-reactive T cell responses and protecting the pancreas from T cell-mediated tissue damage. Thus, PD-L1 is a key mediator of tissue tolerance. The study shows that PD-L1 expression on parenchymal cells is uniquely responsible for the increased onset and penetrance of autoimmune diabetes in PD-L1/PD-L2 -/- NOD mice. The findings suggest that PD-L1 expression on islet cells is important in controlling tolerance. The study also demonstrates that PD-L1 can regulate the initial activation of potentially pathogenic T cells as well as the responses of pathogenic effector T cells. These findings give impetus to the development of therapeutic approaches that exploit the PD-1–PD-L1 pathway for controlling diabetes and/or islet transplant rejection.