In the year 1996, Los Angeles has become a crime-ridden hell where street gangs control the city. The most powerful gang leader, Simon Phoenix, has set up the largest and most dangerous territory for himself, with his headquarters inside a large, dilapidated building. When he kidnaps about 30 passengers from a city bus, an LA supercop, John Spartan, whom has a reputation for destroying property while working on cases and a long history of reprimand by his superiors, is sent in to arrest Phoenix and rescue the hostages. Spartan bungee jumps onto the roof of Phoenix' headquarters and fights his way through the structure, defeating several of Phoenix' guards. When Phoenix sees Spartan's approach on his security cameras, he grabs a dagger and punctures several barrels of gasoline, spilling it onto the floor. Spartan arrives and orders Phoenix to reveal the location of the hostages. Phoenix catches Spartan off guard, showing him the pool of gas and brandishing a lit torch. He defiantly refuses to give up the hostages and flicks a lit cigarette toward Spartan, igniting the gas. Spartan grabs Phoenix and runs out of the building while the flames ignite several barrels of C4 explosive. The building collapses just after Spartan makes it to safety.
When Spartan's captain shows up, he immediately chastises Spartan for destroying the building per his usual methods (hence, his nickname "The Demolition Man"), however Spartan tells him that Phoenix had deliberately rigged the place to explode. Spartan also tells his chief that he'd done a thermal scan of the building and found only Phoenix and his goons there. Phoenix yells that Spartan was wrong and a fire chief suddenly informs them all that they've found about 30 bodies in the rubble which can only be the bus passengers. Phoenix claims that he told Spartan about the hostages and that Spartan said he didn't care. Spartan's chief tells him to get a good lawyer. Spartan is charged with involuntary manslaughter and sentenced to a 70 year term in a new prison where the inmates are cryogenically frozen. During their incarceration, prisoners are subject to reconditioning to change their behavior.
Thirty-six years later in 2032, the prison is still in operation. Los Angeles has changed considerably, having become a community of peace. The cities of LA, Santa Barbara and San Diego have merged into one giant urban center after a giant earthquake devastated most of Southern California. The San Angeles Police Department hasn't dealt with a violent crime in over 16 years. The city is led by a seemingly benevolent man named Raymond Cocteau, who is responsible for the society LA has become.
Phoenix finds himself unfrozen for a parole hearing. Though it's likely he'll simply be denied, he's given a chance to speak by Warden Smithers. Phoenix gives the password to unlock his shackles and attacks the guards and Smithers. To get past the prison's retinal scanners, he tears out the warden's eye. He steals a car and heads for Los Angeles.
At the SAPD's HQ, the police force are alerted by their central computer, L7, of a "Code 187" which they don't recognize but L7 identifies as "MurderDeathKill". The force is horrified to see that the warden and another doctor of the prison have been killed by Phoenix. They work quickly to locate him and find him on Wilshire Boulevard. At a control kiosk, Phoenix discovers that he has new abilities, such as increased strength, hand-to-hand combat skills and that he can hack the city's computer system. The officers sent to arrest him are no match and he quickly beats or kills them. He then detonates the batteries in one of their squad cars and escapes. Shocked at the level of violence, the SAPD, led by an officer named Lenina Huxley, decide they have to free John Spartan from his prison sentence to stop Phoenix.
Spartan is thawed and reinstated to the police force. He is also told that his wife was killed in the big earthquake of 2010. His daughter's whereabouts are unknown. When he asks for a cigarette, he's told they and a list of foods and vices from the past are illegal because they are unhealthy. He's also told that he's had a microchip implanted in his hand so his location can be monitored at all time. Spartan objects immediately, criticizing the plan as fascist. He also scoffs at the police chief's theory that Phoenix will try to set up a new crime syndicate. Spartan knows that Phoenix' immediate plan is to arm himself and continue his terrorist activities. When the chief tells him that the only guns left in the city limits are in a museum, Spartan and Huxley go there.
In the museum, Phoenix breaks open a display case and grabs several weapons, including a laser firing rifle. Trapped temporarily in the exhibit, Spartan finds Phoenix and the two battle in a vicious gunfight and hand-to-hand. Phoenix is able to escape through the museum's roof. He runs directly into Cocteau and tries to shoot him but is unable to pull the trigger. Cocteau tells Phoenix that he should be hunting a man named Edgar Friendly instead of wasting his time terrorizing San Angeles. Spartan catches up but Phoenix escapes again. Grateful that Spartan "saved" his life, Cocteau invites him and Huxley to dinner at Taco Bell, the only restaurant left in the area after and event called the Franchise Wars.
At dinner, Cocteau and his guests grill Spartan about his unruly methods and vulgar language. He takes most of the criticism as a compliment and makes mention of the fact that he was actually conscious during his incarceration and that he remembers seeing his wife outside his ice block. Cocteau dismisses Spartan's claims. Just then Spartan sees shady-looking people outside the restaurant and runs after them. He takes several of them down but stops when one of them begs him not to hurt him and drops a container of food his group had stolen from the restaurant. Huxley is over-excited, praising Spartan for his ability in hand-to-hand but Spartan scolds her saying that violence isn't the best solution and that the people he'd roughed up were just trying to get something to eat.
Huxley later takes Spartan to her apartment. Saying that the evening's violence has her sexually aroused, she politely asks if John will have sex with her. She places a helmet on his head which uses a form of sensory induction to stimulate their brains directly. John is appalled, preferring physical contact. Huxley explains that physical contact and "fluid exchange" are illegal because of sexually transmitted diseases that were worse than AIDS. She asks John to leave her apartment when John makes physical advances. John returns to his apartment and examines a video recording from the museum she'd given him. He sees that Phoenix, when he'd found Cocteau at the museum, had plenty of time to kill Cocteau but didn't. John grows more suspicious of San Angeles' benefactor.
The next morning John apologizes to Huxley for his behavior. She forgives him and the two access L7's records on Phoenix, finding that he'd been given a rehab program to turn him into an even more violent sociopath than he'd been in 1996. Spartan has Huxley take him to Cocteau's offices where he confronts Cocteau directly, threatening to harm him. Cocteau is still able to conceal his secret: in a later secret meeting with Phoenix, he reveals that he'd altered the villain's rehab program so he'd murder Edgar Friendly and the rest of Friendly's mob, who live in the ruins under Los Angeles, where they are poor, starving and steal food. These "Scraps" are a constant annoyance to Cocteau, who wants them wiped out. Phoenix has a small demand of his own: in order to properly do the job, he wants a few of his fellow cryocons released. However, they will not undergo the same rehabilitation conditioning that Phoenix himself did, making them even more dangerous.
Spartan figures out that the reason why the SAPD's manhunt didn't find Phoenix is because he'd been hiding under the city. Phoenix meets with the cryocons that he'd gotten Cocteau to release and tells them they have to kill Friendly and then the city will be theirs. Spartan and Huxley find Edgar Friendly, who tells them he's not a fan of Cocteau's dictatorship and would rather live his life in abject poverty but still be free. Spartan and Huxley are found by Phoenix and another battle ensues. Phoenix escapes to the surface and steals an SAPD squad car. Huxley & Spartan tear after him in an antique 1970 Oldsmobile 442. During the chase, Phoenix tells Spartan that he'd already killed all the bus passengers in 1996. Phoenix escapes again and Spartan sees Friendly's mob approaching. They give him weapons to go after Phoenix. At Cocteau's office, Phoenix introduces him to his freed prisoner horde and has one of them murder Cocteau, throwing his body in the fireplace. Phoenix is granted access to the cryoprison and plans to thaw out more criminals, many of whom were incarcerated by Spartan and haven't undergone any reconditioning. Spartan goes after Phoenix at the cryoprison after using a stun rod on Huxley to keep her from joining him.
At the prison, Phoenix is finishing the last stages of freeing the prisoners. He kills all the technicians just as Spartan arrives. The two exchange gunfire and fight furiously until Spartan is able to freeze Phoenix. As he swings around on a large crane, he knocks Phoenix' frozen head off, which shatters on the floor. Spartan runs out of the cryoprison as it explodes.
He meets Huxley and his chief outside. The inhabitants of San Angeles aren't sure of how to continue their lives since Cocteau is dead but Spartan assures them they'll be find. He also looks forward to starting a new romantic relationship with Huxley.