Plants with crassulacean acid metabolism (CAM) are increasing in distribution and abundance in drylands worldwide, but the underlying drivers remain unknown. We investigate the impacts of extreme drought and CO₂ enrichment on the competitive relationships between seedlings of Cylindropuntia imbricata (CAM species) and Bouteloua eriopoda (C₄ grass), which coexist in semiarid ecosystems across the Southwestern United States. Our experiments under altered water and CO₂ water conditions show that C. imbricata positively responded to CO₂ enrichment under extreme drought conditions, while B. eriopoda declined from drought stress and did not recover after the drought ended. Conversely, in well‐watered conditions B. eriopoda had a strong competitive advantage on C. imbricata such that the photosynthetic rate and biomass (per individual) of C. imbricata grown with B. eriopoda were lower relative to when growing alone. A meta‐analysis examining multiple plant families across global drylands shows a positive response of CAM photosynthesis and productivity to CO₂ enrichment. Collectively, our results suggest that under drought and elevated CO₂ concentrations, projected with climate change, the competitive advantage of plant functional groups may shift and the dominance of CAM plants may increase in semiarid ecosystems.