Sphagnum mosses account for most accumulated dead organic matter in peatlands. Therefore, understanding their responses to increasing atmospheric CO2 is needed for estimating peatland C balances under climate change. A key process is photorespiration: a major determinant of net photosynthetic C assimilation that depends on the CO2 to O2 ratio. We used climate chambers to investigate photorespiratory responses of Sphagnum fuscum hummocks to recent increases in atmospheric CO2 (from 280 to 400 ppm) under different water table, temperature, and light intensity levels. We tested the photorespiratory variability using a novel method based on deuterium isotopomers (D6S/D6R ratio) of photosynthetic glucose. The effect of elevated CO2 on photorespiration was highly dependent on water table. At low water table (-20 cm), elevated CO2 suppressed photorespiration relative to C assimilation, thus substantially increasing the net primary production potential. In contrast, a high water table (~0 cm) favored photorespiration and abolished this CO2 effect. The response was further tested for Sphagnum majus lawns at typical water table levels (~0 and -7 cm), revealing no effect of CO2 under those conditions. Our results indicate that only hummocks, which typically experience low water table levels, benefit from the 20th century’s increase in atmospheric CO2.