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Abstract Plants with crassulacean acid metabolism (CAM) are increasing in distribution and abundance in drylands worldwide, but the underlying drivers remain unknown. We investigate the impacts of extreme drought and CO₂enrichment on the competitive relationships between seedlings ofCylindropuntia imbricata(CAM species) andBouteloua eriopoda(C₄grass), which coexist in semiarid ecosystems across the Southwestern United States. Our experiments under altered water and CO₂water conditions show thatC. imbricatapositively responded to CO₂enrichment under extreme drought conditions, whileB. eriopodadeclined from drought stress and did not recover after the drought ended. Conversely, in well‐watered conditionsB. eriopodahad a strong competitive advantage onC. imbricatasuch that the photosynthetic rate and biomass (per individual) ofC. imbricatagrown withB. eriopodawere lower relative to when growing alone. A meta‐analysis examining multiple plant families across global drylands shows a positive response of CAM photosynthesis and productivity to CO₂enrichment. Collectively, our results suggest that under drought and elevated CO₂concentrations, projected with climate change, the competitive advantage of plant functional groups may shift and the dominance of CAM plants may increase in semiarid ecosystems.