Peatlands are peat forming ecosystems in which not fully decomposed plant material builds up the soil. The sequestration of carbon into peat is mainly associated with the bryophyte genus Sphagnum (peat mosses), which dominate and literally form most peatlands. The responses of Sphagnum to environmental change help us to understand peatland development and function and to predict future changes in a rapidly changing world. In this thesis, the overarching aim was to use ecophysiological traits to investigate mechanisms behind the response of Sphagnum to elevated N deposition, and, processes connected to ecosystem shift and ecosystem function of peatlands. Regarding elevated N deposition, three experiments were performed at different scales (country-wide to greenhouse). Independent of scale and species, apical tissue N concentration increased with increasing N input until N saturation was reached. Maximum photosynthetic rate, a trait evaluating photosynthetic capacity, increased with N input and could be well predicted by tissue N concentration. Thus, the physiological responses of Sphagnum to N deposition are often positive and I found no evidence of toxic effects. Production did, however, not increase with N input, and results of the N:P ratio suggested that P limitation, and possibly other elements, might hamper growth under high N input. The effect of P limitation was, in contrast to current view, most pronounced in fast growing species indicating species specific responses to nutrient imbalance. I explored the puzzling, but historically frequently occurring, rich fen to bog ecosystem shift; a shift from a species-rich ecosystem dominated by brown mosses, to a species-poor one with greater carbon storage that is Sphagnum-dominated. The bog-dwelling species of Sphagnum grew well, to our surprise, when in contact with rich fen water but was not a strong competitor compared to rich fen Sphagnum species. If submerged under rich fen water (high pH), the bog Sphagnum species died while rich fen species of Sphagnum were unaffected. These results show that differences in two physiological traits (growth rate and tolerance to flooding) among species, can explain when a peatland ecosystem shift might occur. In the last study, the function of peatlands was related to trade-offs between traits and allometric scaling in Sphagnum. Results suggested that growth strategies are determined by the distribution of Sphagnum relative to the water table in order to minimize periods with suboptimal hydration. Allometric analyses stressed the importance of resource allocation among and within shoots (apical part vs. stem), although the allocation patterns in Sphagnum were not always consistent with those of vascular plants. Interestingly, data indicated a trade-off between photosynthetic rate and decomposition rate among Sphagnum species.