Arctic tundra vegetation composition is expected to undergo rapid changes during the coming decades because of changes in climate. Higher air temperatures generally favor growth of deciduous shrubs, often at the cost of moss growth. Mosses are considered to be very important to critical tundra ecosystem processes involved in water and energy exchange, but very little empirical data are available. Here, we studied the effect of experimental moss removal on both understory evapotranspiration and ground heat flux in plots with either a thin or a dense low shrub canopy in a tundra site with continuous permafrost in Northeast Siberia. Understory evapotranspiration increased with removal of the green moss layer, suggesting that most of the understory evapotranspiration originated from the organic soil layer underlying the green moss layer. Ground heat flux partitioning also increased with green moss removal indicating the strong insulating effect of moss. No significant effect of shrub canopy density on understory evapotranspiration was measured, but ground heat flux partitioning was reduced by a denser shrub canopy. In summary, our results show that mosses may exert strong controls on understory water and heat fluxes. Changes in moss or shrub cover may have important consequences for summer permafrost thaw and concomitant soil carbon release in Arctic tundra ecosystems.