Grassland degradation intensifies human-environment conflicts and adversely affects local residents’ livelihoods. To reduce grassland degradation in Inner Mongolia, China, the government has enforced (since 1998) a series of grassland conservation and management policies that restrict the use of grasslands. To ease the impact on the residents’ livelihoods, the national and regional governments have offered a series of top-down arrangements to stimulate sustainable use of the grasslands. Simultaneously, local households spontaneously developed bottom-up countermeasures. To determine the effects of these processes, we interviewed members of 135 households using a mix of qualitative and quantitative methods. We analyzed the effects on household dependence on local grasslands and on perceptions of the future of grassland use. Our findings show that the implementation of the grassland conservation policies significantly affected household livelihoods, which in turn affected household use of natural assets (primarily the land), their agricultural assets (farming and grazing activities) and their financial assets (income and consumption), resulting in fundamental transformation of their lifestyles. The households developed adaptation measures to account for the dependence of their livelihood on local ecosystems by initializing strategies, such as seeking off-farm work, leasing pasture land, increasing purchases of fodder for stall-fed animals and altering their diet and fuel consumption to compensate for their changing livelihoods.