Changes in tundra vegetation structure may amplify Arctic climate warming. Our simulations with a new tundra vegetation model suggest that precipitation increases favour grass abundance, whereas warming favours shrub dominance. However, abrupt permafrost thaw initiating wetland formation leads to grass dominance. Our simulations show that a wetter tundra, due to increased precipitation or abrupt permafrost thaw, could result in local shrub decline instead of the widely expected shrub expansion.