Sphagnum cuspidatum, S. magellanicum and S. rubellum are three co-occurring peat mosses, which naturally have a different distribution along the microtopographical gradient of the surface of peatlands. We set out an experiment to assess the interactive effects of water table (low: −10 cm and high: −1 cm) and precipitation (present or absent) on the CO2 assimilation and evaporation of these species over a 23-day period. Additionally, we measured which sections of the moss layer were responsible for light absorption and bulk carbon uptake. Thereafter, we investigated how water content affected carbon uptake by the mosses. Our results show that at high water table, CO2 assimilation of all species gradually increased over time, irrespective of the precipitation. At low water table, net CO2 assimilation of all species declined over time, with the earliest onset and highest rate of decline for S. cuspidatum. Precipitation compensated for reduced water tables and positively affected the carbon uptake of all species. Almost all light absorption occurred in the first centimeter of the Sphagnum vegetation and so did net CO2 assimilation. CO2 assimilation rate showed species-specific relationships with capitulum water content, with narrow but contrasting optima for S. cuspidatum and S. rubellum. Assimilation by S. magellanicum was constant at a relatively low rate over a broad range of capitulum water contents. Our study indicates that prolonged drought may alter the competitive balance between species, favoring hummock species over hollow species. Moreover, this study shows that precipitation is at least equally important as water table drawdown and should be taken into account in predictions about the fate of peatlands with respect to climate change.