AbstractRecent studies have suggested that drought projections using Palmer drought severity index (PDSI) and standardized evapotranspiration precipitation index (SPEI) may overestimate drought severity. This overestimation occurs because the potential evapotranspiration (PET) calculations fail to consider the interactive effects of vegetation responses such as increased leaf area index (LAI) and constrained stomatal conductance, which are influenced by elevated atmospheric CO2 concentrations ([CO2]). To address this issue, our study replaced the traditional Penman‐Monteith (PM) equation with a recently proposed PET equation that includes the effects of changing [CO2] and LAI to assess droughts at monthly scale in the Upper Yangtze River basin, which experiences the vegetation greening. The findings indicated a consistent increasing trend in drought conditions with minimal discrepancy between the two equations over the historical period (1986–2017). This consistency arises because the water‐saving effects of increased [CO2] and the greening effects of rising LAI largely counterbalance each other. However, for the future period (2018–2100), projections using PM equation predicted an intensification of drought conditions. In contrast, the improved SPEI indicated no significant drought variations, and the improved PDSI suggested a wetting trend. This divergence can be attributed to the water‐saving effects increasingly outweighing the greening effects, as PET shows a decreasing sensitivity to LAI with LAI increasing, but maintains a near‐constant sensitivity to elevated [CO2]. Consequently, the indices based on PM equation tend to overestimate future drought severity. Overall, this study demonstrates that the new PET estimation method is more capable of responding to the changing environment.