The interaction between nitrogen cycling and carbon sequestration is critical in predicting the consequences of anthropogenic increases in atmospheric CO2 (hereafter, Ca). The progressive N limitation (PNL) theory predicts that carbon sequestration in plants and soils with rising Ca may be constrained by the availability of nitrogen in many ecosystems. Here we report on the interaction between C and N dynamics during a four-year field experiment in which an intact C3/C4 grassland was exposed to a gradient in Ca from 200 to 560 micromol/mol. There were strong species effects on decomposition dynamics, with C loss positively correlated and N mineralization negatively correlated with Ca for litter of the C3 forb Solanum dimidiatum, whereas decomposition of litter from the C4 grass Bothriochloa ischaemum was unresponsive to Ca. Both soil microbial biomass and soil respiration rates exhibited a nonlinear response to Ca, reaching a maximum at approximately 440 micromol/mol Ca. We found a general movement of N out of soil organic matter and into aboveground plant biomass with increased Ca. Within soils we found evidence of C loss from recalcitrant soil C fractions with narrow C:N ratios to more labile soil fractions with broader C:N ratios, potentially due to decreases in N availability. The observed reallocation of N from soil to plants over the last three years of the experiment supports the PNL theory that reductions in N availability with rising Ca could initially be overcome by a transfer of N from low C:N ratio fractions to those with higher C:N ratios. Although the transfer of N allowed plant production to increase with increasing Ca, there was no net soil C sequestration at elevated Ca, presumably because relatively stable C is being decomposed to meet microbial and plant N requirements. Ultimately, if the C gained by increased plant production is rapidly lost through decomposition, the shift in N from older soil organic matter to rapidly decomposing plant tissue may limit net C sequestration with increased plant production.