Expression of bone morphogenetic protein 4 (BMP4) in adipocytes of white adipose tissue (WAT) produces “white adipocytes” with characteristics of brown fat and leads to a reduction of adiposity and its metabolic complications. Although BMP4 is known to induce commitment of pluripotent stem cells to the adipocyte lineage by producing cells that possess the characteristics of preadipocytes, its effects on the mature white adipocyte phenotype and function were unknown. Forced expression of a BMP4 transgene in white adipocytes of mice gives rise to reduced WAT mass and white adipocyte size along with an increased number of a white adipocyte cell types with brown adipocyte characteristics comparable to those of beige or brite adipocytes. These changes correlate closely with increased energy expenditure, improved insulin sensitivity, and protection against diet-induced obesity and diabetes. Conversely, BMP4-deficient mice exhibit enlarged white adipocyte morphology and impaired insulin sensitivity. We identify peroxisome proliferator-activated receptor gamma coactivator 1-α (PGC1α) as the target of BMP signaling required for these brown fat-like changes in WAT. This effect of BMP4 on WAT appears to extend to human adipose tissue, because the level of expression of BMP4 in WAT correlates inversely with body mass index. These findings provide a genetic and metabolic basis for BMP4’s role in altering insulin sensitivity by affecting WAT development.