Alkynes can be selectively hydrogenated into alkenes on solid palladium catalysts. This process requires a strong modification of the near-surface region of palladium, in which carbon (from fragmented feed molecules) occupies interstitial lattice sites. In situ x-ray photoelectron spectroscopic measurements under reaction conditions indicated that much less carbon was dissolved in palladium during unselective, total hydrogenation. Additional studies of hydrogen content using in situ prompt gamma activation analysis, which allowed us to follow the hydrogen content of palladium during catalysis, indicated that unselective hydrogenation proceeds on hydrogen-saturated beta-hydride, whereas selective hydrogenation was only possible after decoupling bulk properties from the surface events. Thus, the population of subsurface sites of palladium, by either hydrogen or carbon, governs the hydrogenation events on the surface.