Green Innovation in the Age of AI

Using a novel, patent-based measure of firms' use of AI in their innovation process, we find that green firms, after adopting AI technologies, achieve an approximately 15-24 percent increase in green innovation output and a significant improvement in green innovation quality, although gains in profitability are limited by higher associated costs. The improvement in green innovation primarily arises from AI, particularly Generative AI, which accelerates knowledge discovery and enables firms to integrate insights from diverse technological domains to create novel and impactful solutions. This process relies on firms' ability to deploy AI effectively, supported by the availability of AI talent and broad AI skill penetration. We establish causality through a differencein-differences design and further explore factors that could enhance firms' AI usage in innovation activities.