Forests provide a broad set of ecosystem services, including climate regulation. Other ecosystem services can be ecosystem dependent and are in part regulated by local‐scale decision‐making. In the southwestern United States, ongoing climate change is exacerbating a legacy of fire‐exclusion that has altered forest structure and increased high‐severity wildfire risk. Management can mitigate this risk by reducing forest density and restoring frequent surface fires, but at the cost of reduced carbon stocks. We sought to quantify the role of management in building adaptive capacity to projected climate and wildfires and the carbon consequences in a forested watershed. We simulated carbon dynamics under projected climate and wildfires and two management scenarios: prioritized and optimized. The prioritized scenario involved thinning and prescribed burning in areas selected by stakeholders to mitigate high‐severity wildfire risk. The optimized scenario used the probability of high‐severity wildfires to locate thinning treatments and increased prescribed fire area burned relative to the prioritized scenario. Both scenarios reduced wildfire severity and significantly increased net photosynthesis relative to no‐management. However, the optimized scenario decreased management‐related losses by 2.4 Mg • C • ha−1 and wildfire emissions by 2.9 Mg • C • ha−1 relative to the prioritized scenario. By decreasing the area thinned and increasing the area burned relative to the prioritized scenario, the optimized scenario halved the time to realize a net carbon benefit relative to no‐management. Given the increasing climatic and disturbance pressures impacting southwestern forests, management will play a critical role in building adaptive capacity and ensuring the continued provision of ecosystem services.