Soil carbon (C) in permafrost peatlands is vulnerable to decomposition with thaw under a warming climate. The amount and form of C loss likely depends on the site hydrology following permafrost thaw, but antecedent conditions during peat accumulation are also likely important. We test the role of differing hydrologic conditions on rates of peat accumulation, permafrost formation, and response to warming at an Arctic tundra fen using a process-based model of peatland dynamics in wet and dry landscape settings that persist from peat initiation in the mid-Holocene through future simulations to 2100 CE and 2300 CE. Climate conditions for both the wet and dry landscape settings are driven by the same downscaled TraCE-21ka transient paleoclimate simulations and CCSM4 RCP8.5 climate drivers. The landscape setting controlled the rates of peat accumulation, permafrost formation and the response to climatic warming and permafrost thaw. The dry landscape scenario had high rates of initial peat accumulation (11.7 ± 3.4 mm decade−1) and rapid permafrost aggradation but similar total C stocks as the wet landscape scenario. The wet landscape scenario was more resilient to 21st century warming temperatures than the dry landscape scenario and showed 60% smaller C losses and 70% more new net peat C additions by 2100 CE. Differences in the modeled responses indicate the largest effect is related to the landscape setting and basin hydrology due to permafrost controls on decomposition, suggesting an important sensitivity to changing runoff patterns. These subtle hydrological effects will be difficult to capture at circumpolar scales but are important for the carbon balance of permafrost peatlands under future climate warming.