The special is set shortly after the events of Shrek the Third (and before the events of Shrek Forever After), as Shrek and Fiona's children are still infants.
Shrek (Mike Myers) is quietly living in the swamp with his family when the Christmas season arrives. Under Donkey's (Eddie Murphy) urging, Shrek reluctantly promises Princess Fiona (Cameron Diaz) a special Christmas surprise. Shrek goes to the local bookstore in Far, Far Away to try to find a present for Fiona, but since he does not know what Christmas is all about, the shopkeeper (Marissa Jaret Winokur) gives Shrek a copy of Christmas For Village Idiots, a step-by-step guide to celebrating the holiday. Shrek proceeds to follow the book's advice by decorating the house and getting a tree so he can spend a quiet Christmas Eve with his family, but Donkey brings the entire "family" to the swamp, ruining Shrek's plans.
As Shrek tries to tell his own version of "A Visit from St. Nicholas (The Night Before Christmas)"; Gingy, Donkey, and Puss in Boots (Antonio Banderas) interrupt and each tell their own version of a Christmas story. Donkey tells of floats coming to the swamp. At the end, Donkey tells of licking an enormous Santa figure that is made out of waffles, but in reality he accidentally starts licking Shrek's leg. Puss tells his version of the story of Santa Claus, but ends up playing with the ball point of his Santa hat, while in reality he is playing with one of the baubles from the christmas tree. However, Gingy's story is not happy, but horrifying, as he tells about how his girlfriend Suzy got eaten up by Santa Claus. To which Donkey finds it unbelievable, with Gingy screaming "You weren't there!". Donkey finds Shrek's Christmas for Village Idiots book, and the ensuing fight over the book destroys all of Shrek's decorations, furniture and the tree. Shrek then loses his temper and ends up ejecting his friends from his house.
With the Christmas spirit ruined, Fiona and Shrek have a talk, after which she takes the children and leaves the swamp to go and apologize to their friends. Shrek feels downhearted that Christmas Eve did not go as he hoped it would, and he looks at one of Donkey's Christmas cards that says, From Donkey & family. Fiona catches up to their friends and explains to Donkey what Shrek had wanted for Christmas. Shrek catches up with the group, and apologizes for losing his temper. Donkey is shocked to learn that this is Shrek's first Christmas, because "ogres don't celebrate anything." Donkey also apologizes for being annoying, and explains that Christmas never goes as planned and according to his mother, "'Christmas ain't Christmas until somebody cries', and that's usually me."
After a snowball fight, the friends return to the swamp, and Shrek tells his story, featuring Ogre Claus. Soon they hear bells and go outside to see Santa and his reindeer, although Gingy runs back inside screaming in terror.