For the Community Atmosphere Model version 6 (CAM6), an adjustment is needed to conserve dry air mass. This adjustment exposes an inconsistency in how CAM6’s energy budget incorporates water—in CAM6 water in the vapor phase has energy, but condensed phases of water do not. When water vapor condenses, only its latent energy is retained in the model, while its remaining internal, potential, and kinetic energy are lost. A global fixer is used in the default CAM6 model to maintain global energy conservation, but locally the energy tendency associated with water changing phase violates the divergence theorem. This error in energy tendency is intrinsically tied to the water vapor tendency, and reaches its highest values in regions of heavy rainfall, where the error can be as high as 40 W m−2 annually averaged. Several possible changes are outlined within this manuscript that would allow CAM6 to satisfy the divergence theorem locally. These fall into one of two categories: 1) modifying the surface flux to balance the local atmospheric energy tendency and 2) modifying the local atmospheric tendency to balance the surface plus top-of-atmosphere energy fluxes. To gauge which aspects of the simulated climate are most sensitive to this error, the simplest possible change—where condensed water still does not carry energy and a local energy fixer is used in place of the global one—is implemented within CAM6. Comparing this experiment with the default configuration of CAM6 reveals precipitation, particularly its variability, to be highly sensitive to the energy budget formulation. Significance Statement This study examines and explains spurious regional sources and sinks of energy in a widely used climate model. These energy errors result from not tracking energy associated with water after it transitions from the vapor phase to either liquid or ice. Instead, the model used a global fixer to offset the energy tendency related to the energy sources and sinks associated with condensed water species. We replace this global fixer with a local one to examine the model sensitivity to the regional energy error and find a large sensitivity in the simulated hydrologic cycle. This work suggests that the underlying thermodynamic assumptions in the model should be revisited to build confidence in the model-simulated regional-scale water and energy cycles.