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The hydrogenation of carbon dioxide (CO2) to produce light olefins is one of the most promising ways to utilize CO2 in power plant flue gas. However, the low concentration of CO2 (~10%) and the existence of water steam in the flue gas pose great challenges for the catalyst design. To address these problems, we introduced a Mg promoter and hydrophobic component into the Fe-based catalyst to improve the CO2 adsorption capacity and weaken the negative effects of water. The yield of light olefins on an optimized multifunctional Fe-based catalyst increased by 37% in low-concentration CO2 hydrogenation with water steam. A variety of characterizations proved that the Mg promoter played critical roles in regulating the adsorption capacity of CO2, increasing the surface electron density of Fe species, and promoting the formation of iron carbide active sites. The hydrophobic component mainly contributed to constraining the oxidation of iron carbides via water steam. It benefited from the rational design of the catalyst, showing how our multifunctional Fe-based catalyst has great potential for practical application in CO2 utilization. [ABSTRACT FROM AUTHOR]