This paper systematically analyzes the driving forces and mechanism of fuelwood substitution and related ecological consequences in an under-developed county in rural Southeast China. Based on 358 respondents from rural households in Changting County, as well as additional statistical data, we present strong evidence in support of the argument that changes in the livelihoods of rural households lead to fuelwood substitution and finally, hilly ecosystem restoration. Important factors influencing fuelwood substitution are closely linked with changes in rural livelihoods: off-farm employment and agricultural specialization. Therefore, these changes are argued to be the primary driving force of fuelwood substitution. Reasons include the increasing opportunity costs of fuelwood collection, increases in household income, and decreases in household energy consumption for cooking, feeding and heating. Such changes have unexpectedly caused significant progress in hilly ecosystem restoration, particularly in mitigation of soil erosion and forest degradation. Thus, it is suggested that the progressive change and improvement in the livelihoods of rural households should be included in the mix of policies intended to restore hilly ecosystems.