The hydrogenation of 1-pentyne over various palladium catalysts was studied under various conditions. In the regime of selective hydrogenation, as observed by in situ X-ray photoelectron spectroscopy, significant amounts of subsurface carbon and a Pd-C surface phase built up in the early stage of the reaction. These species inhibited the emergence of bulk-dissolved hydrogen to the surface, which is reactive but unselective. Carbon laydown was also observed by tapered element oscillating microbalance and by catalytic pulse experiments, with greater laydown occurring in the selective regime. The effect of carbon dissolution in the crystal lattice near the surface was evidenced by high-resolution transmission electron microscopy. In alkyne hydrogenation, the active phase of palladium catalysts is a Pd-C surface phase in the regime of selective hydrogenation. Because self-hydrogenation (hydrogen from dissociated pentyne) was also shown to be unselective, only surface hydrogen from the gas phase is available to generate the alkene. The issue of structure-sensitivity of alkyne hydrogenation over palladium catalysts is discussed in terms of structure-sensitive carbon deposition and carbon dissolution into the metal lattice.