The carotid body is a peripheral chemoreceptor that plays a central role in mammalian oxygen homeostasis. In response to sustained hypoxia, it manifests a rapid cellular proliferation and an associated increase in responsiveness to hypoxia. Understanding the cellular and molecular mechanisms underlying these processes is of interest both to specialized chemoreceptive functions of that organ and, potentially, to the general physiology and pathophysiology of cellular hypoxia. We have combined cell lineage tracing technology and conditionally inactivated alleles in recombinant mice to examine the role of components of the HIF hydroxylase pathway in specific cell types within the carotid body. We show that exposure to sustained hypoxia (10% oxygen) drives rapid expansion of the Type I, tyrosine hydroxylase expressing cell lineage, with little transdifferentiation to (or from) that lineage. Inactivation of a specific HIF isoform, HIF‐2α, in the Type I cells was associated with a greatly reduced proliferation of Type I cells and hypoxic ventilatory responses, with ultrastructural evidence of an abnormality in the action of hypoxia on dense core secretory vesicles. We also show that inactivation of the principal HIF prolyl hydroxylase PHD2 within the Type I cell lineage is sufficient to cause multilineage expansion of the carotid body, with characteristics resembling paragangliomas. These morphological changes were dependent on the integrity of HIF‐2α. These findings implicate specific components of the HIF hydroxylase pathway (PHD2 and HIF‐2α) within Type I cells of the carotid body with respect to the oxygen sensing and adaptive functions of that organ.