My head canon on this one is a roleplay within a story. The three kids are bored with always being on the 'nice' list; so they figure the best present to get each other is to end up on the 'naughty' list.

The boy plays Santa, the dark haired girl is the elf, and the blonde plays a random girl.

The blonde has been 'naughty' and is punished by being made into a Christmas tree. The elf, in the process of helping Santa boy punish the blonde girl, gets a little 'naughty' with the blonde. So then Santa boy has to punish his naughty elf. Then realizing he was 'naughty' with the blonde too, Santa boy punishes himself.