CeO2 is a promising catalytic oxidation material for flue gas mercury removal. Density functional theory (DFT) calculations and periodic slab models are employed to investigate mercury adsorption and oxidation by oxygen over the CeO2 (111) surface. DFT calculations indicate that Hg0 is physically adsorbed on the CeO2 (111) surface and the Hg atom interacts strongly with the surface Ce atom according to the partial density of states (PDOS) analysis, whereas, HgO is adsorbed on the CeO2 (111) surface in a chemisorption manner, with its adsorption energy in the range of 69.9–198.37 kJ/mol. Depending on the adsorption methods of Hg0 and HgO, three reaction pathways (pathways I, II, and III) of Hg0 oxidation by oxygen are proposed. Pathway I is the most likely oxidation route on the CeO2 (111) surface due to it having the lowest energy barrier of 20.7 kJ/mol. The formation of the HgO molecule is the rate-determining step, which is also the only energy barrier of the entire process. Compared with energy barriers of Hg0 oxidation on the other catalytic materials, CeO2 is more efficient at mercury removal in flue gas owing to its low energy barrier.