Northern peatlands and permafrost soils are associated with large carbon stocks. Rising temperatures are likely to affect the carbon balance in high-latitude ecosystems, but to what degree is uncertain. We have enhanced the Lund-Potsdam-Jena (LPJ) dynamic global vegetation model by introducing processes necessary to simulate permafrost dynamics, peatland hydrology, and peatland vegetation. The new version, LPJ-WHy vl.2, was used to study soil temperature, active layer depth, permafrost distribution, and water table position. Modeled soil temperatures agreed well with observations, apart from a Siberian site where the soil is insulated by an extensive shrub layer. Water table positions were generally in the range of observations, with some exceptions. Simulated active layer depth showed a mean absolute error of 44 cm when compared to observations, but the error was reduced to 25 cm when the soil type for seven sites was manually corrected to mirror local conditions. A sensitivity test, in which temperature and precipitation were varied independently, showed that soil temperatures and active layer depths increased more under higher temperatures when precipitation was increased at the same time. The sensitivity experiment suggested persisting wet conditions in peatlands even under temperature increases of up to 9°C as long as annual precipitation is allowed to increase with temperature to the extent indicated by climate model experiments.