Understanding power dissipation of a diode in a datasheet chart
The graph is not showing how much power the diode will dissipate as a function of temperature.

It shows permissible power dissipation as a function of ambient temperature.  Think about it.  If it's hot all around, less power will get something to a particular temperature than when it's cold all around.

In this case it looks like the diode stops functioning at 175 &deg;C.  If it's already at 174 &deg;C, then you can't put much power into it before it won't function anymore.  If it's at 25 &deg;C, then you can put a lot more power into it before it gets to 175 &deg;C and stops working.