There is an urgent need for reliable and effective models to study air pollution health effects on human lungs. Here, we report the utilization of human pluripotent stem cell (hPSC) induction models for human lung progenitor cells (hLPs) and alveolar type 2 epithelial cell-like cells (ATLs) for the toxicity assessment of benzo(a)pyrene, nano-carbon black, and nano-SiO2, as common air pollutants. We induced hPSCs to generate ATLs, which recapitulated key features of human lung type 2 alveolar epithelial cells, and tested the induction models for cellular uptake of nanoparticles and toxicity evaluations. Our findings reveal internalization of nano-carbon black, dose-dependent uptake of nano-SiO2, and interference with surfactant secretion in ATLs exposed to benzo(a)pyrene/nano-SiO2. Thus, hLP and ATL induction models could facilitate the evaluation of environmental pollutants potentially affecting the lungs. In conclusion, this is one of the first studies that managed to adopt hPSC pulmonary induction models in toxicology studies.