China’s coal-based synthetic natural gas (SNG) projects can reduce air pollution and associated premature mortality by substituting for direct coal use in power, industry, and households. These benefits, however, come with increased CO2 emissions unless carbon capture and storage (CCS) is applied in SNG production. Even with CCS, SNG has higher CO2 emissions than conventional natural gas. In the United States, increases in natural gas supplies have been primarily deployed to the power sector. In China, however, due to inefficient and uncontrolled coal combustion in households, we find that allocating currently available SNG to the residential sector provides the largest air quality and health benefits and smallest climate penalties compared with allocation to the power or industrial sectors.