"It is a lemon candy."
Translation:È una caramella al limone.
"Di" is usually "made of" in this context; so "biscotto di cioccolato" would be a cookie made of chocolate and that sounds weird to me, but looking it up online it seems people do use it for chocolate brownies, perhaps because of the amount of chocolate in them. On the other hand a caramella is mostly made of sugar, not lemon; a candied lemon would be "limone candito".
Dolce isn't the same as caramella, no, but it can reference a number of other confections: for instance "trick or treat" is translated as "dolcetto o scherzetto" (inverting the nouns and applying a diminutive for some reason). By itself "dolce al limone" suggests a cake though.