Abstract: | In this review, I first address the basics of gas exchange, water‐use efficiency and carbon isotope discrimination in C3 plant canopies. I then present a case study of water‐use efficiency in northern Australian tree species. In general, C3 plants face a trade‐off whereby increasing stomatal conductance for a given set of conditions will result in a higher CO2 assimilation rate, but a lower photosynthetic water‐use efficiency. A common garden experiment suggested that tree species which are able to establish and grow in drier parts of northern Australia have a capacity to use water rapidly when it is available through high stomatal conductance, but that they do so at the expense of low water‐use efficiency. This may explain why community‐level carbon isotope discrimination does not decrease as steeply with decreasing rainfall on the North Australian Tropical Transect as has been observed on some other precipitation gradients. Next, I discuss changes in water‐use efficiency that take place during leaf expansion in C3 plant leaves. Leaf phenology has recently been recognised as a significant driver of canopy gas exchange in evergreen forest canopies, and leaf expansion involves changes in both photosynthetic capacity and water‐use efficiency. Following this, I discuss the role of woody tissue respiration in canopy gas exchange and how photosynthetic refixation of respired CO2 can increase whole‐plant water‐use efficiency. Finally, I discuss the role of water‐use efficiency in driving terrestrial plant responses to global change, especially the rising concentration of atmospheric CO2. In coming decades, increases in plant water‐use efficiency caused by rising CO2 are likely to partially mitigate impacts on plants of drought stress caused by global warming. |