In a series of two articles, a novel, robust, and practicable lidar approach is presented that allows us to derive microphysical properties of liquid-water clouds (cloud extinction coefficient, droplet effective radius, liquid-water content, cloud droplet number concentration) at a height of 50–100 m above the cloud base. The temporal resolution of the observations is on the order of 30–120 s. Together with the aerosol information (aerosol extinction coefficients, cloud condensation nucleus concentration) below the cloud layer, obtained with the same lidar, in-depth aerosol–cloud interaction studies can be performed. The theoretical background and the methodology of the new cloud lidar technique is outlined in this article (Part 1), and measurement applications are presented in a companion publication (Part 2) (Jimenez et al., 2020a). The novel cloud retrieval technique is based on lidar observations of the volume linear depolarization ratio at two different receiver fields of view (FOVs). Extensive simulations of lidar returns in the multiple scattering regime were conducted to investigate the capabilities of a dual-FOV polarization lidar to measure cloud properties and to quantify the information content in the measured depolarization features regarding the basic retrieval parameters (cloud extinction coefficient, droplet effective radius). Key simulation results and the overall data analysis scheme developed to obtain the aerosol and cloud products are presented.