Conversion of grasslands to woodlands may alter the sensitivity of CO2 exchange of individual plants and entire ecosystems to air temperature and precipitation. We combined leaf-level gas exchange and ecosystem-level eddy covariance measurements to quantify the effects of plant temperature sensitivity and ecosystem temperature responses within a grassland and mesquite woodland across seasonal precipitation periods. In so doing, we were able to estimate the role of moisture availability on ecosystem temperature sensitivity under large-scale vegetative shifts. Optimum temperatures (Topt) for net photosynthetic assimilation (A) and net ecosystem productivity (NEP) were estimated from a function fitted to A and NEP plotted against air temperature. The convexities of these temperature responses were quantified by the range of temperatures over which a leaf or an ecosystem assimilated 50% of maximum NEP (Ω50). Under dry pre- and postmonsoon conditions, leaf-level Ω50 in C3 shrubs were two-to-three times that of C4 grasses, but under moist monsoon conditions, leaf-level Ω50 was similar between growth forms. At the ecosystems-scale, grassland NEP was more sensitive to precipitation, as evidenced by a 104% increase in maximum NEP at monsoon onset, compared to a 57% increase in the woodland. Also, woodland NEP was greater across all temperatures experienced by both ecosystems in all seasons. By maintaining physiological function across a wider temperature range during water-limited periods, woody plants assimilated larger amounts of carbon. This higher carbon-assimilation capacity may have significant implications for ecosystem responses to projected climate change scenarios of higher temperatures and more variable precipitation, particularly as semiarid regions experience conversions from C4 grasses to C3 shrubs. As regional carbon models, CLM 4.0, are now able to incorporate functional type and photosynthetic pathway differences, this work highlights the need for a better integration of the interactive effects of growth form/functional type and photosynthetic pathway on water resource acquisition and temperature sensitivity.