True cedar trees belong to the genus Cedrus. Much of the cedar mulch sold in the United States is not, in fact, made from true cedar trees, but from juniper trees, colloquially called Eastern Red Cedar, or arborvitae, often called Western Red Cedar. Both of these "alternative" sources of cedar mulch, members of the genus Juniperus and the genus Thuja, respectively, are completely nontoxic to young plants and therefore safe to use as mulch.
Cedar mulch made from true cedar is thought by many to be toxic to young seedlings, but research indicates that this is only a problem when the particle size of the mulch is very small, as would be the case with cedar sawdust. Indeed, a study of the effects of water in which cedar mulch has been soaked on the germination of seeds showed that high concentrations of cedar extract may delay germination for a few days, but does not result in any long-term damage to the seed or plant.
Cedar mulch forms a moisture barrier above the soil, preventing evaporation of water from the soil into the air to a large degree. If mulch is placed on 1 of 2 identical beds, the unmulched bed can be expected to need twice as much irrigation as its mulched neighbor to maintain the same soil moisture levels. For this reason, mulching is an excellent strategy for gardeners living in areas with frequent droughts and water restrictions.
By itself, cedar mulch does not have the correct carbon-to-nitrogen ratio to undergo microbial breakdown like that which occurs in compost piles. Cedar mulch is high in carbon, but contains very little nitrogen compared to the soil below. When such a high-carbon material mixes with soil, it can pull nitrogen out of the soil, to the detriment of plants in the area. This is not a problem with mulch applied on top of the soil, but is a good reason not to use cedar mulch on vegetable gardens or other areas that will be tilled on a regular basis.