Large interannual variations in the measured growth rate of atmospheric carbon dioxide (CO2) originate primarily from fluctuations in carbon uptake by land ecosystems. It remains uncertain, however, to what extent temperature and water availability control the carbon balance of land ecosystems across spatial and temporal scales. Here we use empirical models based on eddy covariance data and process-based models to investigate the effect of changes in temperature and water availability on gross primary productivity (GPP), terrestrial ecosystem respiration (TER) and net ecosystem exchange (NEE) at local and global scales. We find that water availability is the dominant driver of the local interannual variability in GPP and TER. To a lesser extent this is true also for NEE at the local scale, but when integrated globally, temporal NEE variability is mostly driven by temperature fluctuations. We suggest that this apparent paradox can be explained by two compensatory water effects. Temporal water-driven GPP and TER variations compensate locally, dampening water-driven NEE variability. Spatial water availability anomalies also compensate, leaving a dominant temperature signal in the year-to-year fluctuations of the land carbon sink. These findings help to reconcile seemingly contradictory reports regarding the importance of temperature and water in controlling the interannual variability of the terrestrial carbon balance. Our study indicates that spatial climate covariation drives the global carbon cycle response.