Forest leaf area has enormous leverage on the carbon cycle because it mediates both forest productivity and resilience to climate extremes. Despite widespread evidence that trees are capable of adjusting to changes in environment across both space and time through modifying carbon allocation to leaves, many vegetation models use fixed carbon allocation schemes independent of environment, which introduces large uncertainties into predictions of future forest responses to atmospheric CO2 fertilization and anthropogenic climate change. Here, we develop an optimization-based model, whereby tree carbon allocation to leaves is an emergent property of environment and plant hydraulic traits. Using a combination of meta-analysis, observational datasets, and model predictions, we find strong evidence that optimal hydraulic-carbon coupling explains observed patterns in leaf allocation across large environmental and CO2 concentration gradients. Furthermore, testing the sensitivity of leaf allocation strategy to a diversity in hydraulic and economic spectrum physiological traits, we show that plant hydraulic traits in particular have an enormous impact on the global change response of forest leaf area. Our results provide a rigorous theoretical underpinning for improving carbon cycle predictions through advancing model predictions of leaf area, and underscore that tree-level carbon allocation to leaves should be derived from first principles using mechanistic plant hydraulic processes in the next generation of vegetation models.