The pyrolytic fragmentation of cellulose in the presence of atomic palladium (Pd) and palladium(II) chloride (PdCl2) has been studied with use of hybrid density functional theory and cellobiose as a model for cellulose. The configuration changes in the host, rearrangement of geometries of the products, and the respective reaction energetics for different fragmentation pathways are analyzed. While Pd is found to undergo insertion at the beta-1,4-linkage oxygen (O1)-carbon (C-1) of the rings, Pd(II) chloride is observed to promote the cleavage of the chain as well as rearrangement of the rings. A detailed mechanism for the formation of levoglucosan from one of the fragments following the interaction with PdCl2 is also highlighted.