The importance and consequences of extreme events on the global carbon budget are inadequately understood. This includes the differential impact of extreme events on various ecosystem components, lag effects, recovery times, and compensatory processes. In the summer of 2007 in Barrow, Arctic Alaska, there were unusually high air temperatures (the fifth warmest summer over a 65-year period) and record low precipitation (the lowest over a 65-year period). These abnormal conditions were associated with substantial desiccation of the <i>Sphagnum</i> layer and a reduced net <i>Sphagnum</i> CO<sub>2</sub> sink but did not affect net ecosystem exchange (NEE) from this wet-sedge arctic tundra ecosystem. Microbial biomass, NH<sub>4</sub><sup>+</sup> availability, gross primary production (GPP), and ecosystem respiration (<i>R</i><sub>eco</sub>) were generally greater during this extreme summer. The cumulative ecosystem CO<sub>2</sub> sink in 2007 was similar to the previous summers, suggesting that vascular plants were able to compensate for <i>Sphagnum</i> CO<sub>2</sub> uptake, despite the impact on other functions and structure such as desiccation of the <i>Sphagnum</i> layer. Surprisingly, the lowest ecosystem CO<sub>2</sub> sink over a five summer record (2005–2009) was observed during the 2008 summer (~70% lower), directly following the unusually warm and dry summer, rather than during the extreme summer. This sink reduction cannot solely be attributed to the potential damage to mosses, which typically contribute ~40% of the entire ecosystem CO<sub>2</sub> sink. Importantly, the return to a substantial cumulative CO<sub>2</sub> sink occurred two summers after the extreme event, which suggests a substantial resilience of this tundra ecosystem to at least an isolated extreme event. Overall, these results show a complex response of the CO<sub>2</sub> sink and its sub-components to atypically warm and dry conditions. The impact of multiple extreme events requires further investigation.