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An estimated 1700 Pg of carbon is frozen in the Arctic permafrost and the fate of this carbon is unclear because of the complex interaction of biophysical, ecological and biogeochemical processes that govern the Arctic carbon budget. Two key processes determining the region’s long-term carbon budget are: (a) carbon uptake through increased plant growth, and (b) carbon release through increased heterotrophic respiration (HR) due to warmer soils. Previous predictions for how these two opposing carbon fluxes may change in the future have varied greatly, indicating that improved understanding of these processes and their feedbacks is critical for advancing our predictive ability for the fate of Arctic peatlands. In this study, we implement and analyze a vertically-resolved model of peatland soil carbon into a cohort-based terrestrial biosphere model to improve our understanding of how on-going changes in climate are altering the Arctic carbon budget. A key feature of the formulation is that accumulation of peat within the soil column modifies its texture, hydraulic conductivity, and thermal conductivity, which, in turn influences resulting rates of HR within the soil column. Analysis of the model at three eddy covariance tower sites in the Alaskan tundra shows that the vertically-resolved soil column formulation accurately captures the zero-curtain phenomenon, in which the temperature of soil layers remain at or near 0 °C during fall freezeback due to the release of latent heat, is critical to capturing observed patterns of wintertime respiration. We find that significant declines in net ecosystem productivity (NEP) occur starting in 2013 and that these declines are driven by increased HR arising from increased precipitation and warming. Sensitivity analyses indicate that the cumulative NEP over the decade responds strongly to the estimated soil carbon stock and more weakly to vegetation abundance at the beginning of the simulation.