According to the ASPCA, citronella is toxic to dogs in large doses, but small quantities are not harmful. The ASPCA notes that citronella is safe for use in collars that deter dogs from unwanted behaviors, such as barking.
The National Pesticide Information Center explains that citronella comes from two different grass varieties. The U.S. Environmental Protection Agency categorizes citronella as a minimum risk pesticide. PetMD cautions that citronella oil should not be exposed to a dog's fur or skin for extended periods of time, but using it in the air is fine. Additionally, most citronella collars only contain a small percentage of citronella oil.