Paulina Lake is located within the collapsed crater, or "caldera" of Newberry Volcano. Nearly five miles in diameter, this caldera encircles the basins of Paulina Lake, and its twin, East Lake. Neither lake receives water from an inlet stream, but instead, rely on rain, snowmelt and hot springs for water. Paulina Creek drains the lake and has chiseled a narrow gorge through the caldera's west wall creating a remarkable twin waterfall. Thermal vents and hot springs along the lake's northeast edge help create a highly productive ecosystem.
Wetlands, diverse forests, and rocky slopes near the campground provide a necessary habitat for shorebirds, porcupine, deer, bats and the occasional black bear.