This work assessed the fabrication of nitrogen-doped CQDs (NCQDs) from alkali lignin (AL) obtained from spruce, representing a green, low-cost biomass generated by the pulp and biorefinery industries. The AL was found to retain its original lignin skeleton and could be used to produce NCQDs with excellent photoluminescence properties by one-pot hydrothermal treatment of AL and -phenylenediamine. These NCQDs exhibited blue-green fluorescence (FL) with excitation/emission of 390/490 nm under optimal conditions. The NCQDs showed pH and excitation wavelength-dependent FL emission behaviors. On the basis of the exceptional selective response of these NCQDs to specific solvents, we developed a FL probe for the detection of formaldehyde (FA). The FL intensity of NCQDs was found to be directly proportional to the concentration of FA in the range of 0.05 to 2 mM ( = 0.993), with a detection limit of 4.64 µM (based on 3/). A composite film comprising NCQDs with poly(vinyl alcohol) was found to act as a sensor with a good FL response to FA gas. When exposed to gaseous FA, this film exhibited increased FL intensity and transitioned from blue-green to blue. A mechanism is proposed in which the NCQDs react rapidly with FA to generate Schiff bases that result in enhanced FL emission and the observed blue shift in color.