A significant climatic shift and marine incursion have been reported in the Paleogene sediments from the LishuiJiaojiang Sag, leading to the deposition of two distinct source beds: the lacustrine mudstones of the Yueguifeng Formation (E1y, ca. 66-64.6 Ma) and the marine mudstones of the Lingfeng Formation (E1l, ca. 61.6-59.2 Ma). However, the impact of this transition on source rock development remains unclear. We present a comprehensive geochemical and paleontological analysis of the E1y and E1l source rocks. Both total organic carbon (TOC) and Rock-Eval pyrolysis data show that the abundance and type of organic matter in the Jiaojiang Sag are superior to those in the Lishui Sag, and the hydrocarbon potential of the E1y is better than that of E1l. These differences are associated with paleoecological transition driven by climate change, marine incursion, and tectonic subsidence. During the E1y deposition, low values of strontium/copper, boron/gallium and C21/C23 tricyclic terpanes indicate a more fresher water column under the humid climate. In the Jiaojiang Sag, abundant freshwater algal fossils (Pediastrum and Botryococcus) and notable algal biomarkers (C30 tetracyclic polyprenoids, C30 TPP) suggest that lower aquatic organisms were the primary biological source. Moderate subsidence rate created the isolated lacustrine environments with a stable, anoxic bottom water (low pristane/phytane and high vanadium/ chromium), further enhancing the development of high-quality source rocks. In contrast, the good source rock developed in the Lishui Sag is attributed to open lake hydrology, more oxic conditions (higher pristane/phytane and lower vanadium/chromium), and a reduced algae contribution (lower C30 TPP levels). During the E1l deposition, as the climate transitioned to arid conditions and continued marine incursion, the appearance of Spiniferites ramosus fossils and the further decline in C30 TPP from the E1l source rocks indicate the replacement of freshwater algae by marine algae. Intense fault activity increased the influx of terrestrial organic matter (higher oleanane, T-bicadinane, and isopimarane levels) into the basin via the expansion of braided river deltas. Redox indicators reveal the oxygen-rich conditions hindered organic matter preservation, resulting in fair to good shallow marine source rocks. Our findings demonstrate the sensitivity of paleoecology to the late Paleocene climate fluctuations and marine incursion, and further highlight the diversity of Paleocene paleoecology resulted in unique geochemical characteristics and different hydrocarbon potential of source rocks.