Woody encroachment is occurring in grasslands worldwide, with largely unknown effects on local carbon and water fluxes and the energy balance. Water-use efficiency (λ) is a measure of carbon assimilation per evapotranspiration. Here, a was compared among three different grassland ecosystems in eastern KS, USA, by using the eddy covariance technique. Variation in λ was examined at multiple timescales and across different burning regimes. Site-specific variations in λ were more readily observed at seasonal and inter-annual timescales rather than daily and monthly averages. Annually burned grassland with homogeneous C4 grass cover had less negative values of λ [lower water-use efficiency (WUE)] than infrequently burned grassland that is presently undergoing woody encroachment and a transition to a shrub-dominated ecosystem. The most likely explanation for differences in λ are differences in rooting depth and source-water acquisition between encroaching woody plants and the native grass community. Reliance on a deeper water source by the woody community may buffer the negative consequences of forecasted climate variability and drought, resulting in greater landscape WUE and reduced susceptibility to water stress when compared with the coexisting grass species. Copyright © 2013 John Wiley & Sons, Ltd.