Peatlands and permafrost are important components of the carbon cycle in the northern high latitudes. The inclusion of these components into a dynamic global vegetation model required changes to physical land surface routines, the addition of two new peatland-specific plant functional types, incorporation of an inundation stress mechanism, and deceleration of decomposition under inundation. The new model, LPJ-WHy v1.2, was used to simulate net ecosystem production (NEP), net primary production (NPP), heterotrophic respiration (HR), and soil carbon content. Annual peatland NEP matches observations even though the seasonal amplitude is overestimated. This overestimation is caused by excessive NPP values, probably due to the lack of nitrogen or phosphorus limitation in LPJ-WHy. Introduction of permafrost reduces circumpolar (45–90°N) NEP from 1.65 to 0.96 Pg C a−1 and leads to an increase in soil carbon content of almost 40 Pg C; adding peatlands doubles this soil carbon increase. Peatland soil carbon content and hence HR depend on model spin-up duration and are crucial for simulating NEP. These results highlight the need for a regional peatland age map to help determine spin-up times. A sensitivity experiment revealed that under future climate conditions, NPP may rise more rapidly than HR resulting in increases in NEP.