The reaction mechanism of lignin pyrolysis in hydrogen plasma has been studied by using phenethyl phenyl ether as the model compound. Density functional theory was employed here. Many possible reactions were proposed. All calculations were performed in the Gaussian 09 program, and the reaction enthalpies and activation energies of these reactions were determined at the B3LYP/6-31G (d,p) level. Calculation results indicate that syngas and acetylene are the main products of lignin pyrolysis in hydrogen plasma. The aldehyde group is the main source of CO. The dehydrogenation process is responsible for the production of hydrogen, and active hydrogen atoms in plasma can make it more favorable. Acetylene mainly comes from the benzene ring and its branch. A subsequent discussion on biomass pyrolysis in plasma found that biomass composition has important effects on product distribution. Syngas can come from both cellulose and lignin, while only lignin is the main source of acetylene formation.