This phenomenon is the result of tiny electric sparks that occur when sucrose crystals in the Lifesaver crack as they are exposed to severe stresses. A separation of electric charge occurs between the two sides of the fracture tip and an electric discharge occurs through the air separating those two sides. The light that you see is produced by this electric discharge.

To understand how this charge separation occurs, we must look at how crystals respond to stress. Many crystalline materials are microscopically asymmetric, meaning that their molecules form orderly arrangements that aren't entirely symmetric. To visualize such an arrangement, consider a collection of shoes: an orderly arrangement of left shoes can't be symmetric because a left shoe isn't its own mirror image—you can't built a fully symmetric system out of asymmetric pieces. Like left shoes, sucrose molecules (the molecules in table sugar) are asymmetric so that a crystal of sucrose is also asymmetric.

Whenever you squeeze a crystal, exposing it to stress, its electric charges rearrange somewhat. In a symmetric crystal, this microscopic rearrangement doesn't have any overall consequences. But in an asymmetric crystal such as sucrose, the microscopic rearrangement can produce a large overall rearrangement of electric charges and huge voltages can appear between different parts of the crystal. The most familiar such case is in the spark lighters for gas grills, where a stressed asymmetric crystal creates large sparks. In a Wint-O-Green Lifesaver, the large build-ups of charge cause small sparks that produce the light you see.