AbstractFeedbacks between the intertwined water and carbon cycles in semi‐arid mountain ecosystems can introduce large uncertainties into projections of carbon storage. In this study, we sought to understand the influence of key mechanisms on carbon balances, focusing on an ecosystem whose complex terrain and large interannual variability in precipitation adds to its vulnerability to warming. We applied a dynamic vegetation‐ecosystem model (Lund‐Potsdam‐Jena General Ecosystem Simulator) to simulate water‐carbon interactions in the 104,512 km2 Mediterranean‐climate ecosystems of California's Sierra Nevada for 1950–2099. Our 48 scenarios include a combination of carbon dioxide (CO2) increase, air temperature change, and varying plant rooting depths. We found that with warming (+2 and +5°C), water limitations on growth and enhanced soil respiration reduce carbon storage; however, CO2 fertilization and associated enhanced water‐use efficiency offset this loss. Using the 4 km model resolution to capture steep mountain precipitation gradients, plus accounting for the several meters of actual root‐accessible water storage in the region, were also important. With warming accompanied by CO2 fertilization our projections show that the Sierra Nevada sequestering at least 200 Tg (2 kg m−2) carbon, versus carbon loss with warming alone. The increase reflects coniferous forests growing at high elevations, and some increase in broadleaved forests at low‐to‐intermediate elevations. Importantly, uncertainty in fire disturbance could shift our finding from carbon sink to source. The improved mechanistic understanding of these feedbacks can advance modeling of carbon‐water interactions in mountain‐ecosystem under a warmer and potentially drier climate.