Arctic and Boreal terrestrial ecosystems are important components of the climate system because they contain vast amounts of soil carbon (C). Evidence suggests that deciduous shrubs are increasing in abundance, but the implications for ecosystem C budgets remain uncertain. Using midsummer CO2 flux data from 21 sites spanning 16° of latitude in the Arctic and Boreal biomes, we show that air temperature explains c. one-half of the variation in ecosystem respiration (ER) and that ER drives the pattern in net ecosystem CO2 exchange across ecosystems. Woody sites were slightly stronger C sinks compared with herbaceous communities. However, woody sites with warm soils (> 10 °C) were net sources of CO2, whereas woody sites with cold soils (< 10 °C) were strong sinks. Our results indicate that transition to a shrub-dominated Arctic will increase the rate of C cycling, and may lead to net C loss if soil temperatures rise.