Corporal Moralès and his men are resting outside the guardhouse as Micaëla comes looking for Don José. The change of guard arrives, among them Corporal José and Lieutenant Zuniga. Zuniga questions José about the nearby cigarette factory and the girls who work there. The cigarette girls leave the factory for a break, and the men await a glimpse of Carmen. When she appears, Carmen flirts with them and gives a flower to José. Micaëla returns and gives José a letter from his mother. She leaves when he begins to read the letter that advises him to marry Micaëla and settle down.
Screams are heard from the cigarette factory, and Zuniga sends José to find out the cause of the disturbance. José returns with Carmen and another girl, Manuelita, whose face has a knife wound allegedly inflicted by Carmen. When Carmen refuses to speak, Zuniga orders José to tie her hands and take her to prison and leaves to make out the warrant for Carmen’s arrest. Carmen hints to José about a rendezvous at her friend Lillas Pastia’s tavern, and José agrees to let her escape. When Zuniga returns with the warrant, Carmen breaks free as she is being led off to prison. José is demoted and arrested for his participation in Carmen’s escape.
Carmen and her Gypsy friends Frasquita and Mercédès sing and dance at Lillas Pastia’s tavern. Zuniga tells Carmen that José has been released from prison. A procession announces the arrival of the toreador, Escamillo. Attracted to Carmen, he invites her to attend his upcoming bullfight but she declines. As the soldiers leave, Zuniga promises to return to see Carmen. Dancaïre and Remendado come to ask the three Gypsy girls to join them in a smuggling expedition. José arrives and gives Carmen the gold piece she sent him along with a file while he was in prison. He explains that his soldier’s honor prevented him from trying to escape. Carmen dances for José, but when retreat sounds, he starts to leave for the barracks. She taunts him and challenges him to follow her to the mountains. Zuniga returns and José attacks him in a jealous rage, but the smugglers break up the fight and disarm José. José has no choice but to join the band of smugglers.
The smugglers are at work in the mountains. After a brief period of happiness, Carmen has become fed up with José’s jealousy. Frasquita and Mercédès read their own good fortune in the cards. When Carmen takes her turn, she only finds death. Dancaïre asks the girls to distract the customs men on duty, leaving José on guard. Looking for José, Micaëla is led to the smuggler’s cove by a mountain guide who warns her of the perils she faces. She hides as Escamillo arrives unexpectedly. A jealous José challenges him to a knife fight, but Carmen and the smugglers separate them. Escamillo invites the band of smugglers to his next bullfight. Micaëla is discovered hiding, and she tells José that his mother is dying. He leaves with her, but warns Carmen that they will meet again.
The crowd gathers outside the arena for the bullfight. When Carmen and Escamillo appear, Frasquita and Mercédès warn her that José is in the crowd. Carmen declares she is not afraid of José and waits alone outside the arena. José confronts her and begs that she return to him. She coldly tells him all is over between them and returns the ring he had given her. José stabs Carmen and confesses to the murder.