Density functional theory (DFT) calculations on Pd-Cu bimetallic catalysts reveal that the stepped PdCu(111) surface with coordinatively unsaturated Pd atoms exposed on the top is superior for CO 2 and H 2 activation and for CO 2 hydrogenation to methanol in comparison to the flat Cu-rich PdCu 3 (111) surface. The energetically preferred path for CO 2 to CH 3 OH over PdCu(111) proceeds through CO 2 * → HCOO* → HCOOH* → H 2 COOH* → CH 2 O* → CH 3 O* → CH 3 OH*. CO formation from CO 2 via a reverse water-gas shift (RWGS) proceeds more quickly than CH 3 OH formation in terms of kinetic calculations, in line with experimental observation. A small amount of water, which is produced in situ from both RWGS and CH 3 OH formation, can accelerate CO 2 conversion to methanol by reducing the kinetic barriers for O−H bond formation steps and enhancing the TOF. Water participation in the reaction alters the rate-limiting step according to the degree of rate control (DRC) analysis. In comparison to CO 2 , CO hydrogenation to methanol on PdCu(111) encounters higher barriers and thus is slower in kinetics. Complementary to the DFT results, CO 2 hydrogenation experiments over SiO 2 -supported bimetallic catalysts show that the Pd-Cu(0.50) that is rich in a PdCu alloy phase is more selective to methanol than the PdCu 3 -rich Pd-Cu(0.25). Moreover, advanced CH 3 OH selectivity is also evidenced on Pd-Cu(0.50) at a specific water vapor concentration (0.03 mol %), whereas that of Pd-Cu(0.25) is not comparable. The present work clearly shows that the PdCu alloy surface structure has a major effect on the reaction pathway, and the presence of water can substantially influence the kinetics in CO 2 hydrogenation to methanol.