In New Zealand, native shrubs are considered an important potential carbon-sink in disturbed or abandoned land (e.g., pastoral land that is unsustainable for long-term pastoral agriculture). However, the impact of varying environmental drivers on carbon uptake from photosynthesis and carbon loss from respiration of a developing shrubland remains uncertain. In this study, the effects of both temperature and soil water content (θ) on photosynthesis and respiration were examined under controlled growth cabinet and field conditions in a pasture grass and the native shrub, kānuka (Kunzea ericoides var. ericoides). The purpose of the investigation was to assess the combined impacts of varying temperature and θ on canopy processes and to disentangle the effects of θ on photosynthesis and respiration for the two different plant types. A controlled growth cabinet study (Chapter 2) showed that θ had a greater effect on the short-term temperature response of photosynthesis than the temperature response of respiration. The optimum value of θ for net photosynthesis was around 30 % for both kānuka and the grass. Statistical analysis showed that the temperature sensitivity of photosynthetic parameters was similar for both plant types, but the sensitivity of respiratory parameters was different. Reduction in θ induced an inhibition of photosynthetic capacity in both plant types. The response of respiratory parameters to θ was not related to substrate limitations, however available evidence suggests that it is likely to be a species dependent plant mechanism in regulating the cost of maintenance due to reduced photosynthate assimilation and decreasing energy supply to support the activity of respiratory enzymes. Results obtained from a field study (Chapter 3) showed that photosynthesis and respiration in the grass and kānuka were sensitive to seasonal changes in temperature and θ. Photosynthetic parameters showed little acclimation following changes in seasonal growth conditions. In contrast, respiratory parameters tended to acclimate more strongly. Respiratory acclimation to multiple environmental conditions was characterised by changes in temperature sensitivity and a shift in the response of respiration to temperature, demonstrating the involvement of both ‘Type I’ and ‘Type II’ acclimation in both plant types. The results from controlled growth cabinet and field studies were used to drive a leaf level model that integrates the responses of photosynthesis and respiration to changes in temperature and θ and incorporates acclimation using variable photosynthetic and respiratory parameters (Chapter 4). This model was used to estimate the annual canopy carbon exchange of the grass and kānuka in response to seasonal changes and to predict changes in canopy carbon exchange under varying future climate change scenarios. The model highlighted the importance of considering seasonally-acclimated parameters in estimating canopy carbon exchange of both plant types to concurrent changes in multiple environmental variables. The overall results support the conclusion that understanding the combined effects of environmental variables on canopy processes is essential for predicting canopy net carbon exchange of a pasture-shrub system in a changing global environment. It has been shown here that the rate of increase in photosynthesis with increasing θ is greater than that of respiration which results in a progressively greater apparent carbon gain at moderate values of θ. Moreover, the impact of lower values of θ, which reduced the apparent sensitivity of respiration to temperature, may effectively decrease the rate of respiration during warmer summer months and enhance thermal acclimation via downregulation of respiration. Therefore, considering the influence of soil water conditions on the temperature sensitivity of photosynthetic and respiratory model parameters has important implications for precisely predicting the net carbon exchange of a pasture-shrub system.