Emphysema, the progressive destruction of gas exchange surfaces in the lungs, is a hallmark of chronic obstructive pulmonary disease (COPD) that is presently incurable. This therapeutic gap is largely due to a poor understanding of potential drivers of impaired tissue regeneration, such as abnormal lung epithelial progenitor cells, including alveolar type II (ATII) and airway club cells. We discovered an emphysema-specific sub-population of ATII cells located in enlarged distal alveolar sacs, termed asATII cells. Single cell RNA-seq and in situ localisation revealed that asATII cells co-express the alveolar marker surfactant protein C (SPC) and the club cell marker secretaglobin-3A2 (SCGB3A2). A similar ATII sub-population derived from club cells was also identified in mouse COPD models using lineage labeling. Human and mouse ATII sub-populations formed 80-90% fewer alveolar organoids than healthy controls, indicating reduced progenitor function. Targeting asATII cells or their progenitor club cells could reveal novel COPD treatment strategies.