Although lignin is a promising candidate as a source of polyol for producing eco-friendly polyurethane foam (PUF), its direct application has limitations, primarily stemming from the brittleness of the resulting products and poor processibility at high lignin loadings. To address these technical challenges, we introduced an effective co-solvent for the lignin-based polyurethane foams (LPUFs) with up to 80 wt% of lignin substitution for petroleum polyols. As a green co-solvent that involves carbon dioxide fixation during its production, propylene carbonate (PC), was blended with lignin and improved the distribution of lignin by decreasing the viscosity, providing a room-temperature reaction. The LPUFs demonstrated a comparable thermal insulation performance (R-values greater than 5 in−1) with commercially available PUF with a uniform size of closed-cell structure induced by the reduced viscosity of lignin-based polyol. LPUFs also showed enhanced fire retardancy and moisture resistance compared to the control PUFs, benefiting from lignin’s intrinsic fire-resistant and hydrophobic properties. To mitigate the brittleness issue at high lignin loadings, flexible polyethylene glycols (PEGs) with a high molecular weight (i.e., PEG-1000) were dissolved in PC at room temperature to further improve the mechanical strength of LPUFs. The compressive strength of LPUFs with 80 wt% lignin substitution content was remarkably improved to 226 kPa by the employment of co-solvent and PEG-1000 compared to the control PUF (<140 kPa). Moreover, the flexibility of the LPUFs was successfully controlled by simply adjusting the PEG-400/PEG-1000 ratio. The results of this study provide valuable insights for accelerating and broadening the utilization of lignin in sustainable materials and manufacturing areas.