Human pluripotent stem cell (hPSC)-derived alveolar epithelial cells (AECs) provide new opportunities for understanding lung development and the treatment of pulmonary diseases. However, toxicity assessments using hPSC-AECs have not been undertaken. In this study, we generated functional AECs from hPSCs and evaluated their inflammatory and apoptotic responses to cadmium (Cd) exposure (1, 5, and 10 μM) for 24 h compared with the human bronchial epithelial cell line (BEAS-2B) and primary AECs as controls. Our data showed that Cd (10 μM) treatment induced substantial inflammatory responses and apoptosis in BEAS-2B cells, but not in both hPSC-AECs and primary AECs. Interestingly, conditioned medium from AEC cultures significantly alleviated apoptotic and inflammatory responses to Cd exposure in BEAS-2B cells. Using cytokine arrays, several potential factors secreted from hPSC-AECs and primary AECs were detected and may be involved in reducing Cd-induced cytotoxicity. We also observed higher expression of surfactant proteins B and C in both hPSC-AECs and primary AECs, which may contribute to protection against Cd-induced cytotoxicity. These results suggested that hPSC-AECs phenotypically and functionally resemble primary AECs and could be more biologically relevant alternatives for evaluating the pathological contribution of confirmed or potential pulmotoxic materials included in smoking and microdust.