Change in land cover is a global concern of the twenty-first century. The extreme involvement of humans for its existence plays a dynamic role in the process of this change. The spatio-temporal analysis of urban land cover change helps us to understand the dynamics of the changing environment and to predict how the changes could happen in the future. In Ethiopia, several studies have shown a steady increase in the number of unplanned urban settlements at the expense of agricultural and forest land. In the present study, the authors have analyzed the spatio-temporal trends of urban growth dynamics and its effect on carbon sequestration potential in Addis Ababa city, Ethiopia, for the last three decades (1988–2018) and modeled the same for 2028–2038. LANDSAT images for 1998–2018, at a gap of 10 years, were used to study the changes in the land cover for the period. After pre-processing, supervised classification techniques with maximum likelihood algorithm were used to process the images. The classified images were assessed for their overall classification accuracy which was found to be 85.5% with a kappa coefficient of 0.78. This was used to model the land cover map for 2028 and 2038 using a combined model of Markov chain analysis and cellular automata. The InVEST model was used to estimate the carbon sequestration potential in a terrestrial ecosystem by using carbon coefficient of carbon pools, whose values were taken from various published reports for the study area. The classification study shows that the built-up and transport area increased from 10,345.9 ha in 1988 to 27,684.2, at the end of 2018. In contrast, agricultural and grassland decreased from 32,894.3 to 15,823 ha for the same period. Other land cover classes did not show any significant change. Modeled land cover for 2028 and 2038 shows that, if the trend continued for the next two decades, most of other land cover classes shall be converted to built-up and transport area. This modeled reduction in the coverage area of forest, agricultural, and grassland would further lead to a decline in terrestrial carbon sequestration potential. According to this study, the authors conclude that there is already a significant change in the land cover of the study area, which is a cause for concern. If suitable measures are not taken soon, this would end in leaving no space for vegetation and forests. This would, due to a decline in carbon sequestration, further intensify different environmental, socio-economic, and public health problems and prevent the healthy growth of the city. Hence, the policymakers and other stakeholders should work together to decide how land should be used in future so that sustainable development is achieved keeping a balance between growth and environment.