Mandatory waste classification has been widely considered as an effective solution for reducing the production and treatment amount of municipal solid waste. However, there is limited evidence regarding whether and how waste classification can affect the composition of residual waste (RW) and its environmental economic impacts. Here, an accounting method recommended by the Intergovernmental Panel on Climate Change, field surveys and cost-benefit analysis was utilized to investigate the changes in RW composition, environmental impacts and economic benefits under the waste classification policies implementation in Xiamen, China. This study found that: (1) The implementation of waste classification policies led to a significant increase in recyclable content from 17% to 51% and a decrease in organic content from 56% to 32%. (2) Waste classification effectively reduces greenhouse gas emissions from landfilling and incineration by an additional 0.34 tCO2-eq t-1 RW. (3) The introduction of mechanical recycling achieves a saving of 0.47 tCO2-eq t-1 RW at 40% recycling efficiency, a 4.5-fold increase compared to business as usual (BAU). (4) The operational benefits (900 yuan t-1 RW) from the recyclables sorting system offset the total expenses of investment, operation and waste disposal. The study successfully demonstrated that RW source-classified management can optimize the structure of waste composition, reduce environmental emissions and offer detailed guidance for the development of solid waste management systems in other cities in China.