The son of a Norwegian father and Japanese mother, Pedersen was born in Pusan, Korea, and moved with his family to America in the 1920s. He became a naturalized American citizen in 1953. Pedersen was educated at the Massachusetts Institute of Technology and, for most of his career up to his retirement in 1969, he worked as a research chemist for DuPont.

While working on synthetic rubber, Pedersen noted that one of his materials had been contaminated. He investigated the impurity and found that it had a ring structure of 12 carbon and 6 oxygen atoms, with a pair of carbon atoms between each oxygen. Such structures are known as cyclic polyethers. Normally, organic solvents such as ether and benzene will not dissolve sodium hydroxide. Yet Pedersen found that caustic soda did dissolve in his new compound, with the sodium ions binding loosely to the oxygen atoms of the ether. To accomplish this the polyether formed a nonplanar ring with a crownlike structure, with the sodium ions sitting neatly in the center. For this reason, Pedersen named what turned out to be a new class of compounds ‘crown ethers’. Although he made his first observations in 1964, DuPont delayed publication until 1967.

The implications of Pedersen's work were varied and important. If one crown ether could coordinate sodium ions, it was likely that others of different ring size would be able to bind to other metal ions. Crown ethers could therefore be used as a simple means of gathering specific ions from aqueous solutions.

Other chemists were also quick to see the implications of Pedersen's work and it was with two of these, Jean Lehn and Donald Cram, that he shared the 1987 Nobel Prize for chemistry.