Because the decay of organic carbon stored in peatlands can induce significant inputs of CO₂ and methane to the atmosphere, mechanistic understandings of peat dynamics are important to study the earth's responses to increasing anthropogenic CO₂ emissions. Accumulation and decomposition of peat organic carbon are controlled by soil moisture and temperature, and the changing peat depth and texture reciprocally affect soil hydrological and thermal regimes—feedback mechanisms that have not been integrated in previous peat carbon models. In this study, we incorporated these processes into a coupled dynamic soil carbon and land-surface model to reproduce feedback mechanisms that occur in peatlands. The model captured observed patterns of daily and seasonal changes in water table and soil temperature of a peatland in northern Manitoba, Canada, for 2003. Simulations of the long-term accumulation of peat indicated that the positive feedbacks accelerated peat growth in the initial few hundred years after the initiation of a peatland. Peat growth increased summer-time insulation and water retention, and thus the lower soil temperature and higher water table stimulated further growth in peat depth. During subsequent years, as the peat column increased in thickness, the fraction of peat below water table decreased, leading to increased decomposition rates. These mechanisms collectively lead to the faster attainment of the equilibrium amount of soil carbon through time than previously thought. Simulation of the transient responses to changes in climate indicated that the positive feedbacks between peat depth and decomposition rate operated in the reverse direction. Changes in soil hydrological and thermal properties resulted in a significant enhancement of decay of peat column and thus greater carbon losses in transient and permanent responses to warming.