Ra's al Ghul hires the Joker to help him with his latest terrorist scheme, but soon regrets it when the Clown Prince of Crime kidnaps Robin. In a warehouse in Sarajevo, Bosnia, the Joker beats Robin with a crowbar, ultimately leaving him half-dead on the warehouse floor and leaving a bomb behind to finish him off. Batman arrives too late and Jason is killed in the explosion.
Five years later in Gotham City, the vigilante/crime lord Red Hood has assembled a meeting with the city's top-earning thugs and drug dealers. The Red Hood announces his takeover of the drug trade, demanding 40 percent of their earnings in return for protection from Batman and Black Mask.
At the docks, Batman is in pursuit of some thugs in a truck. As he tries to interrogate them, the cargo they were carrying opens and reveals Amazo, a powerful android with the ability to copy the abilities of every metahuman it encounters. Nightwing arrives on the scene to help take Amazo down. After defeating the robot, Batman learns that the thugs were working for the Red Hood who promptly kills the thugs with a sniper rifle. Batman chases the Red Hood to the Ace Chemical Plant; the site of the first Red Hood's transformation into the Joker. The current Red Hood rigs an explosion in the plant and escapes.
Later in the Batcave, Batman tells Nightwing that since the Red Hood began his reign of terror, drug trafficking has gone up but crime has come down. In the hopes of learning more, Batman and Nightwing proceed to Arkham Asylum to interrogate the Joker about the Red Hood. The Joker taunts Batman with Jason's death, tempting Batman to kill him, and denies any involvement with his successor.
At his headquarters, Black Mask is angry because his "Amazo" was destroyed, and promptly puts a hit out on the Red Hood before discussing the plans for the next incoming shipment; however, both Batman and the Red Hood have bugged the place and so know of the plans as well. The Red Hood shows up and hijacks a helicopter carrying the shipment but is pursued by Batman and Nightwing. Nightwing notes that the Red Hood is highly skilled and able to evade Batman at every turn, including cutting a Bat-lasso before it even went taut on his leg. The chase leads to a train station above ground and an explosion occurs facilitating the Red Hood's escape.
Batman and Nightwing regroup in the Batcave. Batman and Nightwing agree that the Red Hood's skills, methods, and arsenal are comparable to their own, save that the Red Hood is willing to kill to get what he wants. However, there's something else that troubles Batman, and he stays on his computer monitor to watch the video footage of the chase from the cowl's camcorder, trying to figure out what the Red Hood said at the train station. It reveals that the Red Hood said, "You haven't lost your touch, Bruce," meaning that he knows Batman's true identity. Batman recalls Jason performing the same maneuver he had seen the Red Hood use: cutting a lasso on his leg before it went taut. In addition, a flashback reveals that as he got older Jason grew more violent, not always showing the amount of control as Batman.
Meanwhile, one of the eight crime bosses in league with the Red Hood is being beaten by Black Mask's thugs and about to be burned when the Red Hood intervenes. However it is actually a trap and a group called "The Fearsome Hand of Four" attacks the Red Hood who appears beaten, but admits he was merely stalling, hoping Batman would turn up. Batman appears and the two adversaries take on the group together, the Red Hood killing one of his attackers. Batman, implying though not confirming that he knows the Red Hood's identity, asks the Red Hood what has happened to him and offers help. However, the Red Hood replies that it is too late for that, and leaves. For absolute confirmation, a blood sample Batman finds at the scene of the battle and analyses proves to be a match to Jason Todd.
Back at the Black Mask's headquarters, Black Mask learns that his shipment has been destroyed by the Red Hood just before Red Hood shoots a rocket launcher at the Black Mask's office window. However Black Mask survives and is forced to call on the Joker, freeing him from Arkham Acylum and commissioning him to kill the Red Hood.
Back at Wayne Manor, Bruce exhumes Jason's body only to discover it is a fake made of high-end latex. Enraged, he goes to Ra's al Ghul's mansion and demands the truth about Jason. Ra's reveals that he switched Jason's body and revived him in the Lazarus Pit because, as the one who hired the Joker as a distraction from his own activities at the time, he felt responsible for the boy's death. Following his resurrection however, Jason went wild and escaped.
On his way back to Gotham, Batman finds that the Joker has abducted the Red Hood's crime bosses, including Black Mask, and is about to blow them up. The Red Hood appears, revealing that the Joker has always been his real target and that all of the attacks on Black Mask were to get him desperate enough that he would seek aid from the Joker and arrange his escape from Arkham. Batman arrives, swoops in and tries to take the Joker out with him but the Red Hood grabs on to the Joker and cuts the wire holding them, sending the Joker into the river.
Red Hood then tells Batman to come to Crime Alley if he wants the Joker back while, in an abandoned apartment, the Red Hood beats the Joker with a crowbar. After meeting in Crime Alley, Red Hood and Batman fight it out and end up in the apartment where the Joker is being held. Jason confronts Batman saying that, though he has forgiven him for not saving him five years ago, he cannot understand why Batman did not kill the Joker for what he did. Batman confesses that, though he always wanted to kill the Joker, he will not allow himself the pleasure for fear that there would be "no going back". Jason then tosses Batman a gun, telling him he must either kill the Joker or kill him. When Batman refuses, Jason shoots at Batman. He misses and Batman throws a batarang into the barrel of the gun causing the gun to explode in Jason's hand. Jason then sets off a bomb he had previously planted in the room. The bomb goes off and though Batman and the Joker seem relatively unharmed, Jason's body is nowhere to be found.
The Joker is sent back to Arkham, Black Mask is set free on a million dollar bail and in the Batcave, Alfred asks Batman if he should remove the memorial display case containing Jason's Robin uniform. Batman says no, explaining that nothing has changed between Jason and him while a quick flashback show Jason Todd's first time in his Robin costume, with the boy declaring that it is the best day of his life.