In this study, we proposed climate use efficiency (CUE), a new index in monitoring grassland ecosystem function, to mitigate the disturbance of climate fluctuation. A comprehensive evaluation index (EI), combining with actual vegetation net primary productivity (NPP), CUE, vegetation coverage, and surface bareness, was constructed for the dynamic remote sensing monitoring of grassland degradation/restoration on a regional scale. By using this index, the grassland degradation/restoration in the Three-River Source Region (TRSR) was quantitatively evaluated during 2001–2016, which has been an important ecological barrier area in China. Results showed the following: During the study period, the grassland of Yellow River source (SRYe) had high vegetation coverage, NPP, CUE, and low bareness, whereas Yangtze River source (SRYa) had low vegetation coverage, NPP, CUE, and high bareness. The vegetation coverage and CUE of the grassland showed upward trends, with annual change rates of 0.75% and 0.45% year −1. The surface bareness and NPP showed downward trends, with annual change rates of −0.37% year−1 and −0.24 g C m−2 yr−2, respectively. Assessment of EI revealed that 67.18% of the grassland of TRSR showed a recovery trend during the study period. The overall restoration of the SRYe was the best, followed by SRYa. However, the status of Lancang River source (SRLa) was poor.