On Halloween, Scarecrow forces the civilian evacuation of Gotham City after threatening to unleash his potent new fear toxin. Batman tracks Scarecrow to a hideout where he rescues the imprisoned Poison Ivy, who had refused to join Batman's other rogues in Scarecrow's plot. Batman meets with Oracle, who identifies Ace Chemicals as the source of Scarecrow's toxin. Batman investigates the facility but encounters the Arkham Knight and his heavily armed militia. Batman overcomes the forces and locates Scarecrow, who has transformed the entire building into a toxin bomb. Scarecrow reveals that he has kidnapped Oracle, and exposes Batman to the toxin before escaping. Batman inhibits the bomb's blast radius before he is confronted by the Joker.

A flashback reveals that before the Joker died, his infected blood was used in blood transfusions, infecting five people including Batman; Batman, concealing his infection from others, imprisoned the four other recipients who were physically and mentally transforming into the Joker. The Joker, now existing as a mental projection produced by the infected blood and fear toxin, frequently appears to taunt Batman and manipulate his perception of reality. After Batman escapes the exploding Ace Chemicals, he alerts Gordon to Oracle's kidnapping, who angrily leaves to find Scarecrow.

Batman learns that Scarecrow recruited businessman Simon Stagg to build the "Cloudburst"—a mass dispersal device for the fear toxin. Aboard Stagg's airship, Batman interrogates Stagg and finds Scarecrow, but a dose of fear toxin allows the Joker to temporarily assume control of Batman's body while the Arkham Knight extracts the Cloudburst. Recovering, Batman locates Oracle in Scarecrow's hideout, but when he arrives she is exposed to the fear toxin, and commits suicide in terror. Harley Quinn seizes Batman's base in the Panessa movie studio to rescue the Joker-ized patients. Batman and Robin capture Harley and the infected, but one of the patients, Henry Adams, kills the others, before committing suicide, believing that Batman will become the perfect Joker. Realizing that Batman is infected, Robin attempts to imprison him before the Joker takes control, but is instead imprisoned by Batman, who refuses to stop until Scarecrow is caught.