It deploys a cloud of natural gas on the target. As with all gas leaks, it will ignite from explosives, energy weapons and conventional fire while inside the cloud. This results in a fireball on the target. The flame of the gas itself won't actually damage your enemy badly, but it will stun them, giving you an opportunity to flee should you choose to do so.
When the grenade explodes it gives out at least 5 radiation, going down to 1 radiation as well as not stopping until shot into. Enemies carrying weapons such as a flamer or heavy incinerator can be lit aflame instantly simply by throwing the canister at them, due to the flamer and heavy incinerator having a small flame at the end of the weapon which will ignite the gas.
17 bio-gas canisters in total can be found over the course of the quest An Antique Land in the excavated muck holes. 7 are located in the muck holes themselves, and 10 are rewarded upon completion of the questline. They cannot be found anywhere else.
The canisters inflict fire damage to any enemies in the vicinity, though targets aren't set on fire. This is observable by hitting a very weak enemy with the canister, only to watch them die seconds afterwards.
The resulting gas doesn't disappear. This allows for colorful decorations of certain areas.
Reverse-pickpocketing bio-gas canisters onto non-player characters will not kill them, instead just damage them slightly.
Bear traps, though unheated, will light a canister on fire if thrown into it (possibly because of any sparks created from the trap snapping shut).