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 CO2 and H2 activation and for CO2 hydrogenation to methanol in comparison to the flat Cu-rich PdCu3(111) surface. The energetically preferred path for CO2 to CH3OH over PdCu(111) proceeds through CO2* → HCOO* → HCOOH* → H2COOH* → CH2O* → CH3O* → CH3OH*. CO formation from CO2 via a reverse water-gas shift (RWGS) proceeds more quickly than CH3OH 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 CH3OH formation, can accelerate CO2 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 CO2, CO hydrogenation to methanol on PdCu(111) encounters higher barriers and thus is slower in kinetics. Complementary to the DFT results, CO2 hydrogenation experiments over SiO2-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 PdCu3-rich Pd-Cu(0.25). Moreover, advanced CH3OH 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 CO2 hydrogenation to methanol.