Sustainable livelihood theory provides a comprehensive framework for understanding the interactions between livelihoods of peasant households and regional environment change in low-income areas. Based on field survey and 946 questionnaires from peasant household conducted in the case study area of Zhaotong, Yunnan Province, the paper has analyzed the basic characteristics of the rural livelihoods, including the asset base status, the income-generating activities, the energy consumption pattern, and the fertility behavior, in the upper reaches of the Changjiang (Yangtze) River. The micro-level findings show the conflicts among extensive agricultural development models, rural energy consumption structures heavily relying on biomass and the environment protection. The conversion of cropland to forest and grass program(CCFGP) has exerted an important influence on the livelihoods of the peasant households, but its design has given little considerations to their long-term livelihood sources, which will affect its sustainability to a great extent. From the perspective of sustainable livelihoods framework, the objectives that must be addressed in the ecological shelter construction in the upper reaches of the Changjiang River should include, first, facilitating access of peasant households to credit, technology and public services, second, encouraging the peasant households to adopt agricultural technology with environmental benefits and strengthen resources-conserving investments, and third, paying close attention to the rural energy problems and the long-term livelihood sources of the households with CCFGP. Given the weak asset base and difficulties of livelihood strategies shift, ecological shelter construction in the upper reaches of the Changjiang River will take a long time.