AbstractClimate warming can result in both abiotic (e.g., permafrost thaw) and biotic (e.g., microbial functional genes) changes in Arctic tundra. Recent research has incorporated dynamic permafrost thaw in Earth system models (ESMs) and indicates that Arctic tundra could be a significant future carbon (C) source due to the enhanced decomposition of thawed deep soil C. However, warming‐induced biotic changes may influence biologically related parameters and the consequent projections inESMs. How model parameters associated with biotic responses will change under warming and to what extent these changes affect projected C budgets have not been carefully examined. In this study, we synthesized six data sets over 5 years from a soil warming experiment at the Eight Mile Lake, Alaska, into the TerrestrialECOsystem (TECO) model with a probabilistic inversion approach. TheTECOmodel used multiple soil layers to track dynamics of thawed soil under different treatments. Our results show that warming increased light use efficiency of vegetation photosynthesis but decreased baseline (i.e., environment‐corrected) turnover rates ofSOCin both the fast and slow pools in comparison with those under control. Moreover, the parameter changes generally amplified over time, suggesting processes of gradual physiological acclimation and functional gene shifts of both plants and microbes. TheTECOmodel predicted that field warming from 2009 to 2013 resulted in cumulative C losses of 224 or 87 g/m2, respectively, without or with changes in those parameters. Thus, warming‐induced parameter changes reduced predicted soil C loss by 61%. Our study suggests that it is critical to incorporate biotic changes inESMs to improve the model performance in predicting C dynamics in permafrost regions.